Typical Costs Of Bridging Loan
There are many factors that affect the cost of a property bridging loan. The two biggest are the term and interest rate. Those costs vary significantly depending on if the loan is for buying land, an auction property, an existing building or for an other commercial purpose. The Loan to Value or LTV will have an impact on the rate and interest paid over the term.
The term of a bridging loan may be short – even as little as 3-6 months. However, borrowers can also take out a bridging loan for a period of up to 60 months. The longer the period of the loan, the more borrowers pay overall.
The great advantage of property bridging loans is their speed, convenience and non status lending element. You can receive your money rapidly, making even last-minute opportunities accessible. That gives bridging finance a great advantage over standard loans from high street lenders.
We have an online property bridging loan calculator so you can get an idea of your monthly repayments.
We’ll look at some of the factors that come into play when determining the cost of a bridging loan.
What Is The Cost Of A Bridging Loan?
Property Bridging Loan Product Fees
Many bridging loan providers charge product fees. They sometimes call it a facility fee or arrangement fee. They charge this for organising the loan. Usually, this fee is a percentage of the total amount you’re planning to borrow. Usually, it’s around 2% but can range from 1.5% to 3%.
Average Cost Of A Bridging Loan?
Property Bridging Loan Broker Fees
If you decide to use a broker to arrange your bridging loan, they may charge a fee. This could be either a flat rate or a percentage of your total borrowing amount.
You may have to put some money down as a deposit. A higher deposit reduces the interest rate you’re charged.
Survey And Valuation Fees
A surveyor will need to value the property and produce a valuation report for the lender to view. They charge a fee for this service. More costly properties typically attract higher valuation costs.
A Drawdown Fee
Sometimes, lenders charge drawdown fees on top of their product fees. Sometimes, they call these administration fees or assessment fees. You need to pay them to access the loan.
Lenders may also charge a redemption administration fee to cover the cost of removing bridging loan charges from the property.
Exit Fee (if any)
A bridging loan is a very flexible product. That means that it’s possible to pay it off early with no penalty incurred. Nevertheless, some lenders charge exit fees when repaying the loan. Usually, these come in at about 1% of your loan value. Some lenders request a minimum of 3 month’s use.
You will need to pay your own legal costs when buying the property. Also, the bridging loan provider will pass their legal fee onto you for organising the loan. To speed up the process, on occasion we see due representation.
This administrative fee covers bank charges incurred when transferring funds to your solicitor or you from your lender.
When Do I Pay The Fees?
You can roll up many of the fees into your loan. You can then pay them when the loan term comes to an end. Often, this is the most convenient option. However, you should bear in mind you must pay interest every month on those fees. Therefore, it’ll be more costly over time.
There are a few fees that you have to pay upfront including:
- The valuation/survey fee
- Legal fees
- Broker fees in some cases
What Will Affect My Bridging Loan Rates Of Interest?
The Bank of England’s base rate usually influences the interest rates for bridging loans. Nevertheless, different lenders charge different rates. Individual borrowers will be offered a different bridging loan rate based on the following factors:
- The kind of bridging finance you require. If you’re planning to use the loan to buy a residential property, your interest rate may be lower.
- The LTV. The lower the LTV, and client and scheme profile the better the interest rate.
- The location and condition of the property. Bridging lenders must always consider risks, particularly your repayment exit strategy. If you’re purchasing a property in a challenging location to sell, you may face a higher rate. If the property’s condition is poor or the property development is complex, lenders may charge a higher rate too.
- Credit score. Usually, a lender will put most emphasis on the property’s LTV than your own credit score when calculating rates. Therefore, bad or poor credit may not result in the rejection of your application. You may, however, face a higher interest rate due to the extra risk.
How To Repay Property Bridging Loan Interest?
Managing interest payments is another factor you need to bear in mind. Fortunately, property bridging loans are very flexible, allowing you to choose the right repayment option for your situation. You can choose from:
- Monthly repayments. You can pay the interest off your loan each month. Then, you’ll only repay your original borrowed amount at your loan term’s end.
- Deferred/rolled-up interest. Rather than paying the interest monthly, you could defer the interest charges. The lender adds the interest onto your monthly balance. You then pay off the total when the loan term ends.
- Retained interest. Your lender will work out the total amount of interest for the loan’s entire term. They then add that amount to the final balance. You can then repay that amount when the loan term ends. Should you repay your loan early, you’ll receive a refund of the assumed additional interest.
The best kind of repayment to suit your needs depends on your individual circumstances.
Will The Cost Of A Property Bridging Loan Be Different If I’m Purchasing A House?
You can use a bridging loan for many purposes. These include purchasing commercial property, land, or buy-to-let properties. If you’re purchasing a house you’ll see some cost differences.
If you own a property already and plan to use bridging finance to purchase another property, Stamp Duty is relevant. You may be purchasing the second property due to an existing sale falling through or for investment purposes. If you’ve lost a sale consider downsizing with a bridging loan.
Either way, you’ll have to pay a higher rate of Stamp Duty. You must pay an extra 3% of your property’s value as well as the standard rate of Stamp Duty, residential property. Stamp Duty’s standard rate is worked out on a scale from 0% – 12% based on the property’s value. This can be reimbursed provided you sell the first property (main residents) within a certain time scale, so it’s wise to seek tax advice in this case. This applies if you already own a property in your name. Commercial SDLT have different rates.
Fortunately, there are circumstances in which you can receive a refund of this extra Stamp Duty. A refund is applicable if you sell either of the properties within 3 years of purchase completion, so always be sure to get some advice on your taxes relating to this. You could be liable for 0.5% SDLT when acquiring the asset(s) wrapped up in a special purpose vehicle, SPV. As of 17.10.23
Generally, fees for second charge and first charge loans are the same. However, the maximum loan to value for second charge bridging loans will usually be 5% lower than LTVs for first charges. That means you might require a bigger deposit.