How much does a Bridging Loan cost?
Bridging loans are fast becoming the backbone of the commercial property industry, especially during an uncertain market.
They are a short-term finance solution and provide developers and investors with the capital needed to bridge a funding gap and grow their portfolio. The loan is then repaid at the end of the term, usually when the development is re-financed, sold or generating an income.
If you’re considering a bridging loan for your next project, like any finance solution, it’s vital you understand the costs associated with the loan.
While the fees will vary slightly from lender to lender, below is a break-down of the fees you can expect to pay in order to understand the full bridging loan cost.
Lender Arrangement Fee
A 1-2% lender arrangement fee is typical for most bridging loans. This is calculated using the net or gross loan amount. In most cases, the lender fee can be rolled up into the loan. Some providers will also charge an admin fee for arranging the loan.
If you’re using a broker to secure your bridging loan, you can typically expect to pay an upfront fee or 1% of the loan value. This is either added or deducted to the gross loan.
The broker fee can vary based on the complexity and level of work required, however, a broker will work tirelessly to get the best deal for you and aim to save you money overall.
The main cost associated with a bridging loan is the interest and there are three ways a lender can charge this:
- Monthly interest: the interest is paid off each month and it is not added to the loan.
- Deferred or rolled up: the interest is added to the final amount which is paid at the end of the loan term. For example, if you borrowed £100,000 and £1,000 interest was added at the end of the first month, the total owed would be £101,000. In month two, £1,100 in interest will be added, taking the total to £102,100, and so on.
- Retained: the total interest is calculated at the beginning of the term, based on how long you’re borrowing for, and is paid at the end of the loan term. For example, if you borrow £100,000 at 1% interest for 12-months, the total amount owed at the end of the 12 months would be £112,000. If you pay off the loan early after just 6 months, the amount due would reduce to £106,000.
Because a bridging loan is a short-term finance that is paid off within months rather than years, the interest rates are calculated per month rather than annually.
Commercial property rates are higher than those secured against a residential property, and loans against land generally have the highest rates. At the end of 2019, the average interest rate was 0.74%.
When trying to establish the interest rates on a bridging loan for your project, an interest rate of 1% per month is a good benchmark to keep in mind.
The higher the level of risk, the higher the interest rate will be and for borrowers with adverse credit or high-risk developments, interest rates can be anywhere between 1-2%.
What factors affect the interest rate of a bridging loan?
The interest on a bridging loan is calculated based on a number of factors, such as:
- The type of property used as security
- The location of the security property
- The condition of the security property
- The loan to value amount
- The loan amount
- The terms of the loan
- The purpose of the loan
- Whether the loan is a first or second charge
- The borrowers’ experience
- The borrowers’ credit history
Before a bridging loan application can be processed, a professional valuation must be carried out on the property that is being used as security for the loan.
The cost will vary depending on the surveyor, the asset value, location and type of valuation needed. However, you can expect to pay £500-£2000 for commercial properties. Fees for higher value propositions (usually over £1.5 million) may be subject to negotiation.
Because valuations need to be carried out before a loan is completed, the fee is not added to the loan itself and is instead paid directly to the surveyor. It is usually the only upfront fee you can expect to pay.
The amount you can borrow will vary from lender to lender and this will determine how much deposit is required.
Most bridging finance is offered at 70-75% LTV (loan to value), which means for many lenders you will need a deposit of at least 30-35%.
At Ramsay & White, we can offer our clients bridging loans of up to 100% of the purchase price with market-leading rates and terms from as little as 1 month, subject to a full application meeting lending criteria.
The legal fees associated with bridging loans are the redemption fee and solicitor fees. The lender will use a solicitor to carry out the legal due diligence and some will expect the borrower to pay the fee. Additionally, you will have your own legal fees to consider which can vary across the board.
Some lenders will charge an exit fee at the end of the bridging loan, this is typically 1-2% of the loan or equal to one month’s interest. This is added to the loan when it is redeemed. If you decide to pay off the loan early, most bridging providers will not charge an early repayment fee, which means you can save on the interest payments.
A bridging loan application requires a solid exit strategy to ensure the loan is repaid, such as refinancing, selling or producing an income from the development.
If your exit strategy does not go to plan and you are unable to settle up the bridging loan at the end of the terms, some lenders will consider extending the agreement slightly, but, in most cases, you will be liable for extra charges.
Extending the bridging loan is at the lender’s discretion, and some will activate repossession proceedings if the exit strategy has not been met.
Consider all costs
Due to the different factors that determine the cost of a bridging loan, lenders will often use a blanket marketing approach and advertise them as ‘rates from’.
While a low-interest loan is desirable, to find the best solution for your project you need to consider all of the costs mentioned above and not just the interest rates.
The difference in fees charged by each lender can be vast, so if you’re determined to save money, a comparison of all costs is vital.
Contacting every lender individually would be time-consuming, but a broker will be able to guide you in the right direction and source the most appropriate loan for your project.