Bridging Loan Costs
When you are considering taking out a bridging loan there are several costs that you need to look into;
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The first one is the interest rate, which can vary quite dramatically depending on circumstances. You need to keep in mind that these are not long term, high street mortgages so the rate will be higher and while some still think they are too expensive rates have fallen.
Since the boom in the market and influx of money the rates have come down. There are rates from as low as 0.35% per month, though that is not the norm and is subject to strict underwriting and terms.
The majority of loans are currently from around 0.6% per month and up. The rate is variable depending on your particular needs and circumstances. So, the cost of a higher loan to value bridge will be higher. For some enquiries the rate will be up around 1.25-1.5% per month, some are even as high as 2% a month.
In most cases the interest won’t be payable each month, instead it will be either “rolled up” or deducted.
Rolled up just means the interest is added to the loan amount each month and is payable at the end of the loan term. Normally this would be either on sale or remortgage of the security, whatever that may be.
For many this is a great option as their cash flow is not affected by having to pay interest. That said, keep in mind that you are paying interest on interest as it accrues.
Deducted interest is another way lenders can take away the need for monthly payments. In this case you borrow the amount you need, plus the interest at the outset. Though the rate will be quoted in the same way as an interest rolled option, it is actually more expensive.
Look at the pound amount you pay, rather than just the rate, you risk under estimating the cost of the loan if you don’t.
Bridging is given based on specific terms and conditions. For example you would be given the loan at “x” rate over a period of, say, 6 months. If you go past that term or miss a payment, if they are required each month, you may find that you are charged higher rates and or fees.
This is generally the “standard rate”, though they are often referred to as default rates. A typical loan offer would be the standard rate, reduced to the amount you are actually charged, assuming you stay within the terms and conditions.
When taking out a bridge you must be very sure that you can stay within the loan terms, if you do stray outside, it can become significantly more expensive.
As well as interest you also have other costs to cover. Again, depending on your particular requirements the actual cost for you may vary but you can expect to pay:
For the most part lenders will charge you a percentage of the loan amount to provide the loan to you. Typically this would be around 2% and is normally added to the loan when your application is completed.
This fee is at the other end of the loan, when you pay it back. Not all lenders charge them but those that do will typically be 1-2% or possibly a month or two’s worth of interest. With the increased competition in the market from lenders looking to get your business exit fees are becoming a thing of the past in bridging. (They are still common with development finance.)
To make sure that the property you are using as security for the loan actually exists and is worth what you think, a valuation will have to be carried out. The lender would normally instruct a surveyor from their panel to give them an unbiased opinion of value.
The valuation is carried out at the start of the process, and is part of the underwriting and due diligence to be carried out by the lender. You will need to pay for it up front rather than have the cost added to the loan.
The price will vary depending on the expected property value with the cost to be paid by the borrower. A common misconception from the borrower is that the report is theirs but actually it is the lenders. They are instructing the report and despite you paying for it, the report is theirs.
If you want to see a copy of it a lender may well only allow that at the end of the process, to stop you shopping around for a better deal after they have committed time and resources to get the loan in place for you.
The borrower will also have to pay the lenders’ solicitors fees. As with all the other fees involved in bridging, the solicitor cost will potentially vary depending on the size of loan, complexity of case or number of security properties involved.
Most solicitors will want an undertaking for their costs before starting work. This is to ensure they are paid for carrying out their work even if you don’t take the loan or the application is declined, for whatever reason.
Some brokers will charge a fee in addition to any commission that is paid by the lender. We normally look at the overall detail of the case and will talk to you about what, if anything, we would need to charge.
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