How much does a bridging loan cost?

25-November-2021
25-November-2021 13:09
in Bridging
by Jennifer Stevenson
How Much Does A Bridging Loan Cost?

Bridging loans cost less than you might think - especially if you're using one for the right reasons, in the right way. 

And if a bridging loan secures your property purchase at the best price because you’re able to act fast, it can save you money too.

Bridging loan costs come through a number of different fees and admin charges that can look a bit sneaky. We’d like it to be less complicated, but we can’t reorganise the entire mortgage industry.

But it’s a longstanding myth amongst first-time bridging borrowers that short-term property finance is woundingly expensive.

We’re not here to twist your arm: no responsible broker will persuade you to take on borrowing that you can’t afford.

So, here’s our straightforward guide to everything you need to know about how much a bridging loan costs.

In this guide: 

Why would you take out a bridging loan?
Bridging loan interest rates
    - 6 things that affect your bridging loan interest rate
    - How is interest charged on a bridging loan?
5 bridging lender fees you could be charged
Bridging loan survey fees
Bridging loan legal fees
Bridging broker fees
When do I pay the charges for a bridging loan?
How can I get a cheaper bridging loan?
Use our bridging loan calculator

UK Bridging Finance

Why would you take out a bridging loan?

But it is worth saying that we have many, many clients for whom bridge finance has been the best, if not only solution - and they haven’t resented the costs. And they aren’t all multi-million-pound developers with very deep pockets.

Particularly for clients who are downsizing and have built up a sizeable amount of equity on a home they’re selling (or who own it mortgage-free), and have found their dream home that they can't miss out on - the set-up fees and interest cost of a bridging loan is money well spent on the home they plan to live in for 10 years or more.

And if you’re working your way up the property ladder, hoping to buy a property cheap at auction, or taking on a project that needs a lot of renovation work, bridging finance may be your best and only option to getting short term finance set up in time. 

Or, it could secure that property that’s considered “unmortgageable” by mainstream lenders.

Case studies of Clifton Private Finance's bridging loan clients

So, what are the costs of a bridging loan?

Bridging loan interest rates

This is the top-line loan cost you’ll be looking at first. This is an “it depends” cost: see below for the factors that will determine the monthly interest rate you’re offered.

Bridging finance interest is quoted as a monthly rather than an annual rate. This isn’t to disguise the rate - it's because you may not have the short term loan for as long as a year.

And after the minimum term of the first month, interest is actually calculated daily. You can pay back your bridging loan at any time and you'll only pay interest up to the day you repay.

Residential

Buying Before Selling?

Rates from:

0.43% pm

Downsizing/Upsizing

Releasing Funds From Your Home

Short Term Lease Finance

Auction Purchase

As at November 2021

Development & Refurb

Fast Finance

Rates from:

0.43% pm

Ground Up Development

Light & Heavy Refurb

Finance For Unmortgageable Properties

Land Purchase

As at November 2021

Residential

Large Bridging Loans

Rates from:

0.175% pm

Up to 80% LTV

Minimum Loan £500k

Minimum Income £100k

Serviced monthly interest required

As at November 2021

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6 things that affect your bridging loan interest rate:

1. Your loan to value ratio (LTV)

This is the ratio of the loan amount that you need in relation to the value of your property. The lower the ratio, the lower the interest rate you pay. For example, a 50-60% LTV will get you a much lower interest rate than a 75% loan.

Interest rates are linked to the Bank of England base rate. But interest rates also vary from lender to lender depending on the types of properties and clients that they’re comfortable working with.

An experienced mortgage broker with good connections in the industry will take your application to the lender who is best equipped to consider your circumstances most favourably.

2. How much you want to borrow, and for how long

If you’ve already got your “exit” strategy in place (for example, a buyer has already made you an offer on the property you're selling) and you're confident that you won’t need your bridging loan for the full period, your broker may be able to find you a lower rate.

3. Condition of the property and what you’re planning to do

The riskier the proposition, the higher your quoted interest rate may be. A bridging adviser will take down all the details of your plans and put forward your case to the best lenders for your case. 

Short Term Property Loan

4. Is it a regulated or unregulated loan

If the property is your personal home, a bridging loan is regulated by the Financial Conduct Authority to protect you.

If somebody else will be living in the property that isn't a family member, then you'll need an unregulated bridging loan. 

There are fewer regulated lenders in the market compared to unregulated, so it’s possible that your lending options will be more limited.

But because there are more hoops to jump through with a regulated bridge, for your protection, a lender's money is safer and the rates are generally lower than for unregulated loans. 

5. Location of the property

If it’s in a remote, rural location, a lender may feel that it could be trickier for you to sell or get a mortgage to repay your bridging loan, so the interest rate could be higher to reflect that risk.

An awkward location could also make any property development plans you have more difficult and time-consuming. 

Regrettably, properties in northern Scotland and rural North Ireland are harder to find finance for. 

6. Your credit history

In general, bridge finance terms are less focused on your personal financial circumstances than they are on the value of the property.

If you have a bad credit rating you may still get bridging finance (when you might struggle to get a mortgage), but it could be at a slightly higher loan rate.

UK Bridging Loans

How is interest charged on a bridging loan?

On an unregulated loan, if you have sufficient cash flow you can choose to pay the interest monthly. Or, you can roll it into the total loan to be repaid at the end of your term.

For regulated loans, all interest is paid at the end when you repay the total bridging loan (to minimise monthly outgoings for a homeowner who’s also paying a mortgage).

You will need to know if your interest is charged as rolled-up interest, or retained interest. Rolled up interest is compounded, but it is cheaper than retained interest which is charged at a rate assuming you will have your loan for the full term.

The interest type that's best for you will depend on your financial circumstances and what you're looking to do - a bridging adviser can help you get the right loan.

5 bridging lender fees you could be charged

1. Facility Arrangement Fees

A facility fee of 2% is standard across the mortgage industry. It may be 2% of either your net or gross loan amount. A gross fee will be more expensive, but most of the lenders we use at Clifton Private Finance charge their fee on the net loan.

2. Loan Drawdown Fees

Lenders also charge a loan drawdown fee (sometimes also called an assessment fee or an admin fee) which is usually about £295 but can vary depending on the number of properties involved.

3. Redemption Fees

There’s also a redemption fee when your loan is repaid which covers the cost of removing the legal charge from your property (or properties). A redemption fee for a bridging loan is usually around £120.

4. Exit Fees

Some lenders also charge an exit fee of about 1.25% when your loan is repaid – at Clifton Private Finance, we generally avoid working with these lenders.

5. Telegraphic Transfer Fees

This is usually only £25 but serves as an additional cost nonetheless.

Bridging Loans for UK Property

Bridging loan survey fees

Also known as valuation fees. 

Just like with a mortgage, your bridging lender needs to be assured of the market value of the property their loan is secured against, and you'll have to pay for the lender’s valuation costs.

Surveyors charge their fees on a sliding scale depending on the value of the property and the amount of work they’re assessing that needs to be done. 

Survey costs could range from £265 for a property costing £100K that just needs light refurbishment but could be considerably higher for a more complex property valuation.

Bridging loan legal fees

Bridging loans are recorded as a “charge” against a property title, so there are legal costs involved – for both you and the lender.

And again, lenders pass on their legal fees to you as the bridging loan applicant. 

An average cost of a bridging lender’s legal fees would be around £850 + VAT for a property valued up to around £250K.

Bridging broker fees

Finally, there's your bridging adviser's fee.

We typically charge a flat fee of £995 for setting up the finance on your behalf, but this can vary.

If you’ve had the experience of looking for the best deal on a mortgage, and then handling the paperwork involved in the application, you’ll consider this money well spent when you apply this context to securing and pushing through a bridging loan.

Best Bridging Loan Rates

When do I pay the charges for a bridging loan?

You'll need to pay the following bridging loan fees upfront: 

  • The survey fees
  • The legal fees
  • The broker’s fee

Everything else, including the interest, can be rolled into your loan and paid at the end of your term.

How can I get a cheaper bridging loan?

  • If you’re buying a property before selling one that you already own and need to bridge the gap, it may be possible to secure your bridging loan against both properties to get a better interest rate.

  • A good broker will look at all the possible scenarios before they start approaching lenders.

  • Some of the bridging lenders we work with provide “dual representation” on their legal work, which means you don’t have to pay for a solicitor of your own as well as theirs - we use these lenders when we can, as long as their rates and other set up costs are cheaper for you too. 

  • Some lenders are willing to do a "desktop valuation" (or AVM: automated valuation model) if your loan to value is low (less than about 50%) or they’re familiar with the type of property you have. This will save the cost of sending out a surveyor.

Use our bridging loan calculator

Get an approximate idea of what a bridging loan might cost you with our bridging calculator. But keep in mind that a mortgage broker will be able to fine-tune your expected charges to your circumstances:

Bridging loan Clifton Private Finance

Get a copy of our FREE GUIDE to bridging loans

Just fill out our enquiry form at the bottom of the page and put Bridging Loan Guide in the Message box: we’ll send you our Complete Guide to Bridging Loans by email or post.  

Bridging Loan Case Study

Contact us

If you want to discuss how bridging finance could work for you, just call us and an adviser will be able to discuss your situation in detail:

0117 959 5094

Or click here to make an online enquiry with us.