How much does a bridging loan cost?

Bridging loans are short-term financing solutions designed to ‘bridge’ the gap between the need for immediate funds and the availability of permanent financing or the sale of an asset. They are commonly used in property transactions to facilitate quick purchases or developments. However, the convenience of bridging loans comes with various costs that borrowers should carefully consider.

Interest Rates

Bridging loans typically have higher interest rates compared to traditional mortgages. Rates can start from around 0.44% per month but often average about 1% per month, equating to approximately 12% per annum. The exact rate depends on factors such as the loan-to-value (LTV) ratio, the property’s location, and the borrower’s credit profile.

Lender Arrangement Fees

Lenders usually charge an arrangement fee for setting up the loan, typically ranging from 1% to 2% of the total loan amount. For instance, on a £500,000 loan, this would amount to £5,000 to £10,000. In some cases, for larger loans, lenders may consider waiving this fee.

Broker Fees

If you engage a broker to facilitate the bridging loan, expect to incur broker fees. These fees often include an initial application fee of around £1,500, followed by additional charges of approximately 0.5% of the loan amount upon offer and another 0.5% upon completion. For a £500,000 loan, this translates to £2,500 at each stage, totaling £6,500 in broker fees.

Valuation Fees

A professional valuation of the property is typically required to assess its market value. Valuation fees can range but this will depend on the property’s value and complexity. This fee is usually paid upfront and is non-refundable, regardless of whether the loan proceeds.

Legal Fees

Both the borrower and the lender will incur legal costs to handle the necessary documentation and due diligence. Legal fees for the borrower can start from around £750, while the lender’s legal fees, which the borrower typically covers, can be approximately £950 plus VAT for a £500,000 loan.

Exit Fees

Some lenders impose an exit fee when the loan is repaid. This fee is often around 1% of the loan amount. For example, repaying a £500,000 loan could incur a £5,000 exit fee. It’s essential to clarify whether an exit fee applies, as not all lenders charge this fee.

Additional Considerations

• Early Repayment Charges: If you repay the loan before the agreed term, some lenders may charge an early repayment fee. It’s crucial to understand the terms related to early repayment to avoid unexpected costs.
• Administrative Fees: Lenders might also charge administrative fees, which can be around £500, to cover the processing of the loan.

Illustrative Example

Consider a scenario where a borrower takes out a £500,000 bridging loan with the following costs:

• Interest: At 1% per month over 12 months: £60,000
• Lender Arrangement Fee: 2% of £500,000: £10,000
• Broker Fees: £1,500 application fee + 0.5% on offer (£2,500) + 0.5% on completion (£2,500): £6,500
• Valuation Fee: £750
• Legal Fees: Borrower’s legal fees: £750; Lender’s legal fees: £950 + VAT (£1,140): £1,890
• Exit Fee: 1% of £500,000: £5,000

Total Cost: £60,000 (interest) + £10,000 (lender fee) + £6,500 (broker fees) + £750 (valuation) + £1,890 (legal fees) + £5,000 (exit fee) = £84,140

Therefore, the borrower would repay a total of £584,140 over the 12-month period, excluding any potential early repayment or administrative fees.

Conclusion

While bridging loans offer a valuable solution for short-term financing needs, they come with various costs that can add up significantly. It’s essential to thoroughly understand all associated fees, including interest rates, lender and broker fees, valuation and legal costs, and any potential exit or early repayment charges. Engaging with a knowledgeable broker and carefully reviewing the terms can help ensure that the bridging loan aligns with your financial strategy and objectives.