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Bridging Loan Rates.
When considering taking out any loan, the interest rate is one of the main factors that is looked at. Over the last few years, in particular, the cost of short term borrowing has fallen considerably. With bridging loan rates at their lowest ever level, there has never been a better time to use this sort of borrowing.
Low Bridging Loan Rates.
The cost of a bridging loan has come down, since the credit crunch, that saw banks closing their doors to new business. There has been an enormous amount of money put into the market with new lenders popping up regularly.
With the new lenders and competition it has created, lenders are constantly adjusting rates, with many options now available below 1% per month.
You won’t be surprised to learn that qualifying for the lowest of rates is more difficult than more costly facilities. The criteria is stricter and loan to values will be lower.
When you have a decision in principle from a lender, you will be quoted the headline rate. This is the interest you will be charged while you stay within the terms of your agreement. So, as long as you are within the agreed period that is what you will be charged.
It is worth bearing in mind the headline rate on an initial quote is not necessarily the bridging loan rate you end up with. It is vitally important when we work with you to have the correct information – any changes can affect the rate and other terms of your loan.
This is the rate charged when you go outside the loan agreement. This can happen if you miss a payment, in cases where monthly payments are needed (serviced interest), or you go past the agreed term.
In these cases you will be charged the default rate, which is also known as the standard rate by some lenders. While you stay within the agreed contract you continue to be charged the reduced rate.
The difference in cost can be significant so it is very important that you consider the cost implications of both the headline and default rates.
How Interest Rates Are Charged.
There are several ways lenders charge interest. Typically you will have Interest Roll Up, Serviced facilities and Grossed Up or Retained Interest.
Interest Roll Up.
In these cases you do not need to make monthly payments during the term of your loan. Instead, each month, interest is added to the balance until you repay the full amount. This is a common way of charging interest, attractive to borrowers as it does not affect business cash flow.
As the interest is being added to the loan there is interest being charged on interest.
With this method the lender will gross up the interest and retain it to cover the payments. Again, the borrower doesn’t have to make payments on a monthly basis as the whole amount is repaid at the end of the term, or ideally, before it.
For example, if you wanted to borrow £100,000 and the rate to be charged is 1% a month, the lender would actually provide a facility of £112,000, keeping £12,000 back to cover interest costs.
These are most like a “normal” loan. The borrower has to make monthly payments, interest only, through the period of the loan. While this would be the cheapest option, overal, it has to be kept in mind the effect having to make payments will have on a businesses cash flow.
Not keeping up the payments will mean falling foul of the agreement so likely triggering the default rate.
How do Lenders Decide Their Rates?
With the large number of lenders in the market place at the moment, there are wide variations on the interest costs for bridging. The common thread is that most charge on a per month basis. These are short term loans, so they aren’t really designed to be kept beyond 12 months, so the lender has a shorter time to make a return.
That said, there can be a large variation on the cost of the loan, some lenders start as low as 0.34% per month, others sit at 2% per month. Obviously, the lower the rate the more strict the criteria. The higher rates are usually for the more unusual cases, or those that are seen as more risky.
The risk is a combination of factors:
Loan To Value.
This is the ratio of loan compared to available equity. In simple terms, 70% loan to value on a house worth £100,000, would be £70,0000. As you might expect, the lower the ratio the less risk there is and therefore the less the rate options will be. Loan to value also takes into account any other borrowings on the property, which will reduce the actual amount you can borrow.
Type of Security.
What is it the lender is being asked to use as basis for the loan? There are 3 categories for property. Commercial, Semi-commercial ( or mixed use ) and residential.
From a lender point of view, the best option is residential so it is typically cheaper to lend against. At the other end of the scale you have commercial property. It is a more risky proposition as its value can fall quickly and stay there for a long time. Most high streets have empty shop units, which are not as valuable as when they are let, while there is no end of demand for housing stock.
Somewhere in between are semi-commercial units. These have an element of business and residential, think flat above a shop. While not as preferable as residential, having that element makes them lower risk than full commercial property, so the rates would normally come in lower.
Where Is The Security?
London and the South East is favourite for many. In fact, some lenders won’t lend outside the M25. With so many lenders wanting to operate in this location there is much more competition, so the lowest rates are available here.
There are still plenty of options outside London, with a good number of companies being based in Manchester and surrounding areas.
Scotland has significantly fewer options for various reasons, not least that the law on property is different there than England and Wales. With that in mind rates will be that bit higher.
What Condition Is The Property In?
When lending, the provider has to keep in mind how saleable the property will be. This is because either they themselves might have to sell the unit or sale might be the exit route preferred by the borrower.
The better condition a property is, the more chance there will be it can be sold quicker and for better prices than one in need of repair. Bridgers will lend where high street lenders won’t, and short term finance is often used to then carry out improvements on the the subject security. It still has to be factored in to the rate,
as there is always the risk the borrower doesn’t carry out the required work.
What Type Of Legal Charge Is Being Taken?
Most lenders will only lend on a first charge basis, some will insist on it. From a lending point of view these are the least risk and so the cheapest.
Other lenders are happy to provide finance on a second, or even third charge basis.
This is where there is already a loan, typically a long term mortgage, secured on the property and the lender takes a charge behind it. In cases where the property is sold to repay the finance, the second charge lender is only paid off if there is enough money left after the first charge has been cleared. Clearly, third charges are even more risky, so fewer are prepared to do them.
In circumstances where the borrower has to, or wants to, make monthly payments their income and expenditure has to be looked at. Lenders won’t lend where it is clear the borrower cannot afford to make payments, whether individuals or businesses.
Looking from a lender point of view, it is more attractive where the borrower can show they are comfortably able to make the loan payments, than applications where it is “tight”
In most cases, loans are available where monthly payments aren’t needed, so the affordability angle is not a barrier to being able to raise finance.
Term Of The Loan.
As we’ve mentioned, bridging is a short term solution so most loan terms are based over 6 or 12 months. If need be, loans can be arranged for over that period but ehy tend to be higher rates as there are less of them available.
In some circumstances, keeping loans for over 12 months can result in additional fees being charged as lenders look to protect their “internal rate of return”.
Credit Rating Of Applicants.
The cheapest loans are available to those that have the best credit ratings, as you might expect. Even though most facilities don’t require payments and the lender is comfortable with the loan to value, they will still want to see that the borrower has at least decent explanations for any issues.
How Much Does The Lender Pay?
A final, and perhaps most important, factor is the cost of the money to the lender.
Modern bridging providers are funded in various ways from crowd funding to family money. Whatever the source, the cost has to impact the lender ability to price their loans.
There are some lenders that seem to be buying market share, offering loans at such low rates that they are not profitable for most other lenders to match. This can be great for a borrower, though there may well be “strings attached”.
Rates are the first thing that most clients ask about. However, they are not the only thing to take into account. There are the various fees that are attached to these and other types of loan such as arrangement and exit fees. For more information on the costs that you need to look at, you can read this page about bridging loan costs.
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