The cost of a bridging loan is one of many factors that should be considered when deciding whether such a loan is a good option for you. The convenience of being able to borrow money at potentially short notice means a bridging loan can be an expensive form of borrowing, so the alternatives to a bridging loan will usually be worth considering too.
But in the right circumstances, if there’s a financial gap you need to bridge to help you buy a property, the higher costs generally associated with bridging loans might be worth paying.
» MORE: What is a bridging loan?
How much do bridging loans cost?
The overall cost of a bridging loan will depend on the interest rate that is attached to the loan and the fees that the lender charges. In turn, these can both depend on a number of other factors, including the reason you need the bridging loan, your personal circumstances, and how long you want the loan for. The longer the term of the loan, the more it is likely to cost in total.
Ultimately, the cost of a bridging loan will depend on each individual case.
Bridging loan interest rates
Bridging loan interest rates can be either fixed or variable. A fixed rate can provide certainty, as you know what your repayments will be for the period of time, or term, that you have fixed. In comparison, variable bridging loan rates tend to be lower at the start, but could change, often in line with the Bank of England base rate. Therefore a variable rate has the potential to fall, resulting in lower repayments, but also the potential to rise, which could lead to higher repayments.
When looking at interest rates, it’s important to recognise that, unlike most credit options, bridging loans are priced on a monthly basis, as opposed to annually. This is because bridging loans tend to be for terms shorter than a year. If you see a bridging loan rate of 1% monthly, this is the equivalent of paying 12% annually.
When considered on a like-for-like basis, bridging loan rates will work out more expensive than those available on a standard residential mortgage.
What affects the bridging loan interest rate you’ll pay?
Bridging loan interest rates will generally be influenced by the Bank of England base rate. However, rates will also differ between lenders, with the bridging loan rate that individual borrowers can get likely to depend on a range of factors, including:
The type of bridging loan you need
Rates will differ according to whether you want the loan to help you buy a house, to purchase land or for business reasons. You can usually expect the rates charged on bridging loans on land and business bridging loans to be more expensive than if you want a bridging loan for a residential house purchase.
The loan to value (LTV) you’re borrowing at
Similar to mortgage rates, bridging loan rates tend to get lower the smaller the amount you need to borrow relative to the value of the property you’re borrowing against.
Where the property is located and its condition
Bridging lenders always look at risks, and in particular your ‘exit strategy’ to repay the loan. So if the property the bridging loan has been used for is in a location that could make it tricky to sell, your bridging loan rate might be higher to account for this. The same might be true if the potential for development seems less than straightforward, or the condition of the property means it requires considerable repairs.
Your credit score
With bridging loans, lenders tend to place greater emphasis on the value of the property related to the loan than your credit score when considering rates. This means that having poor or bad credit won’t necessarily lead to an automatic rejection of your loan application, but you might be asked to pay a higher rate to counter the additional risk you potentially bring.
» MORE: How bridging loan lending criteria works
How is interest on a bridging loan charged?
Bridging loan interest might be charged in one of three ways:
- Monthly: This is where you only pay the interest each month, meaning it isn’t added to the original loan which stays unchanged, similar to how an interest-only mortgage works.
- Rolled up/deferred: Rather than paying the interest off each month, it is added to the loan amount and rolls up (or is compounded), to be paid off in one go when the loan finishes.
- Retained: This involves borrowing the funds that you need to cover the interest, by calculating at the outset the interest you’ll pay over the full term and adding that to the loan amount to be paid off at the end.
Paying interest on a monthly basis means you avoid paying interest on your interest, which is what effectively happens with the other two options. The best way for you will depend on your situation and might be something you need a loan broker to help you decide.
Bridging loan rate examples
The table below gives you a rough idea of the interest charges that might be payable on bridging loans of various amounts at different interest rates.
|Loan amount||Term (months)||Monthly interest rate||Monthly interest payment||Total interest paid over term|
These figures are indicative only and based on a borrower making monthly payments to pay off the interest owed each month. Payments may be higher if a loan was taken on a rolled up/deferred or retained basis.
Taking out a bridging loan would also usually require paying other charges including an arrangement fee, exit fee, solicitors fees and broker fees, which could add considerably to the overall cost.
Bridging loan fees
Alongside the interest rate, bridging loans come with a number of fees and charges that need to be considered when weighing up the overall cost of bridging loans. These will also differ between lenders but can still be significant sums, even from the most competitive lenders.
Also sometimes called a facility or product fee, this is the charge that most lenders will make for arranging your bridging loan. It will usually be a certain percentage of the amount you need to borrow, and is typically set around 2%. So for a £100,000 bridging loan, the arrangement fee would be £2,000. Some lenders may lower an arrangement fee or even waive it for particularly large loans.
Valuation and survey
Lenders will want to check the valuation of the property you’re borrowing against holds true and make sure it is structurally sound and in an acceptable condition. Valuation and survey fees can vary but will typically rise the more a property is worth and the more detailed the survey needs to be.
Sometimes referred to as an admin or assessment fee, drawdown fees are payable when the time comes to access your loan. These fees vary from lender to lender and could be upwards of £300.
Once you’ve repaid your bridging loan, you’ll then need to pay a redemption fee to remove the legal charge that the loan is recorded as against your property. Typically, this can cost between £100 and £150.
Some bridging loan lenders have an exit fee that is payable once you’ve paid back the loan. This will potentially be somewhere between 1% and 2% of the loan amount or the equivalent of one month’s interest.
Note that exit fees are not the same as an early repayment charge. Because bridging loans are relatively short-term, most bridging lenders don’t charge early repayments fees if you pay the loan off early, unlike most other secured loans and mortgages.
The solicitor costs incurred during the arranging of a bridging loan by you, as the borrower, and the lender will usually both be paid by you. Depending on the amount you borrow, these could reach a four-figure sum with the addition of VAT.
If you use a bridging loan broker or mortgage adviser to help find and arrange your loan, they will need paying too. This might be a flat fee, perhaps of £1,000, or a percentage of the loan amount, maybe up to 2%.
Telegraphic transfer fee
Relatively minor in the grand scheme of things, but still adding to the overall cost of a bridging loan, is the £25 or so you’ll often be charged to cover bank transfer fees.
When do you pay bridging loan fees?
Survey and valuation fees, broker fees and solicitor fees are all usually payable up front.
The other fees don’t normally need to be paid straight away, and can often be added to the loan amount to pay off when the loan comes to an end. While this can provide some leeway, and might be necessary if you don’t have the money to pay outright, it does mean that you’re effectively paying interest on these fee amounts.
Are bridging loans expensive?
Taking out a bridging loan can be expensive, mainly because there is a premium to pay for the convenience and speed such loans can offer borrowers. Depending on your circumstances, it might also be a price worth paying if it prevents your house purchase from falling through or provides the quick finance you need to explore a business opportunity.
How to find a cheap bridging loan
The disparity in bridging loan interest rates and fees between different lenders makes it essential to shop around for the best bridging loan deals.
If you have other priorities besides price, such as the speed at which your loan can be turned around, remember to take this into account too.
WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it. Always check whether a bridging loan is regulated or not. To protect consumers, bridging loans on residential properties must be regulated by the Financial Conduct Authority. Bridging loans on buy-to-let, commercial and investment properties can be unregulated.
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