Bridge loans are a useful financing tool for real estate investors and businesses looking to secure short-term funding. As interest rates rise in 2023, it’s important to understand how bridge loan rates may be impacted. In this comprehensive guide we’ll break down current bridge loan rates examine what’s driven recent increases, and provide tips to secure the most favorable loan terms.
What are Bridge Loans?
A bridge loan is a short-term financing option meant to “bridge a gap” between the purchase of a new property or project and when you can secure permanent, long-term financing.
Bridge loans are frequently used in real estate investing when an investor needs to quickly close on a new property purchase but doesn’t yet have traditional financing lined up. The bridge loan provides the capital to acquire the asset, and then the investor seeks permanent financing or sells the property once they own it.
Businesses also use bridge loans to finance expansions, renovations, or the acquisition of new equipment when timing is critical. The business then repays the bridge loan once longer-term financing options are arranged.
Bridge loans typically have maturities of 6 months to 3 years. The loans are secured by the subject property or project assets.
Current Bridge Loan Interest Rates
In 2023, current bridge loan interest rates range from 9.5% to 12%. This is significantly higher than long-term mortgage and commercial loan rates.
The increase in bridge loan rates is primarily tied to the rapid rise in LIBOR and SOFR benchmark interest rates during 2022. As major banks’ cost of capital has increased, lenders have passed along higher rates to bridge loan borrowers.
Precise bridge loan rates depend on factors like:
- Loan purpose – loans for construction projects tend to have higher rates than loans for existing properties with income
- Loan-to-value ratio – loans with lower LTV ratios qualify for lower rates
- Duration – shorter maturity dates may qualify for slightly better rates
- Credit score – borrowers with higher credit scores can get reduced rates
- Experience – seasoned real estate investors often get better terms than new investors
Loans for vacant land or speculative projects without income tend to be at the top of the range, closer to 12% Loans to finance existing, income-producing properties can potentially be secured for around 10%.
Recent Increases in Bridge Loan Rates
Today’s bridge loan rates represent a major increase from just two years ago. In early 2021, average bridge loan rates were between 7% and 9%.
This jump is directly tied to the substantial rise in LIBOR and SOFR rates during 2022 and early 2023. The Fed has aggressively increased interest rates to combat inflation, which filters through to increased rates for banks and other financial institutions.
As a major benchmark for global banking rates, LIBOR and SOFR increases force lenders to pay more for financing. In turn, those higher capital costs get passed on to borrowers in the form of rate hikes.
Beyond the direct benchmark rate impact, higher returns available on fixed income investments like bonds have also raised investor return expectations. Private lenders must now offer higher interest rates on bridge loans to attract funding.
The net result is bridge loan rates climbing quickly from the 7-9% range in 2021 to the current 9.5-12% range today. Borrowers face significantly higher financing costs for short-term loans.
When Do Bridge Loan Rates Make Sense?
Given the now lofty interest rates, bridge loans don’t make sense for all borrowers and situations. The higher monthly payments can become unaffordable for some.
However, bridge loans can still be attractive if:
- You need financing very quickly for a strategic purchase and have limited time
- The property or project will have significant income/cash flow to support debt service
- You plan to pay off or refinance the bridge loan quickly
- Temporary higher payments are acceptable for your business plan or investment strategy
For lower-risk loans on income-producing assets, an expected 2-3 year hold period can potentially justify today’s bridge loan rates. Higher-risk speculative loans are tougher to justify unless the payoff timeline is very short.
Thoroughly evaluate your repayment plan before committing to today’s expensive bridge loan rates. For longer-term plans, traditional mortgages/commercial loans still provide better rates in most cases.
Tips to Get the Best Bridge Loan Rates
Although rates are elevated in 2023, it’s still possible to secure relatively favorable bridge loan rates by following these tips:
- Shop multiple lenders – Compare quotes from private lenders, commercial banks, and credit unions
- Prioritize local lenders – They may better understand your specific market/project
- Highlight experience – Seasoned investors often get better rate quotes
- Consider cross-collateralization – Use existing property as additional collateral
- Explore variable rates – They may start lower and let you refi if rates fall
- Pay for points – Upfront fees can lower your interest rate
- Enhance down payment – Higher equity lowers LTV ratio and risk
- Shorten maturity – 12-18 months may get better rates than 2-3 years
An experienced commercial finance broker can help you identify the optimal lender and loan structure to minimize rates. The extra effort can potentially save tens of thousands in interest expenses.
Projecting Future Movement in Bridge Loan Rates
It’s challenging to predict exactly how bridge loan rates will trend in the coming year. The direction will largely depend on moves by the Federal Reserve.
If inflation continues to ease in 2023 and the Fed pauses on additional rate hikes, benchmark rates could stabilize, taking pressure off bridge loan rates. This may hold rates in their current elevated 9.5-12% range.
However, if high inflation persists and the Fed boosts rates further, it would likely maintain upward pressure on bridge loans. Average rates exceeding 12% are possible in this scenario.
On the other hand, if a recession hits and the Fed starts lowering benchmark rates, bridge loan rates could also decline somewhat later in 2023. This would provide welcome relief to investors and businesses seeking short-term capital.
Weighing the Pros and Cons of Today’s Bridge Loans
Given their now high cost, it’s important to carefully weigh the advantages and drawbacks of bridge loans in 2023:
Pros
- Quick access to capital with faster approval than permanent loans
- Flexible qualifying if you have past credit challenges
- Allows more time to sell existing properties or assets
- Strategic for time-sensitive investments and acquisitions
Cons
- Very high interest rates vs. permanent mortgage/commercial loans
- Risk of excessive interest costs if repayment is delayed
- Loans may no longer cash flow at elevated rates
- Requires solid exit strategy; refinancing could be difficult
Bridge loans remain useful, but must be approached cautiously and strategically in light of current high rates. Thoroughly projecting costs and timeline is essential.
Work With a Specialized Bridge Loan Broker
Exploring bridge loans in today’s environment requires experience and expertise. Working with a specialized broker is highly recommended.
The right broker will help you:
- Determine if a bridge loan truly fits your needs
- Compare multiple lender quotes
- Negotiate ideal loan terms and rates
- Avoid potential pitfalls and risks
Don’t leave the process to chance. Partnering with a broker maximizes your chances of securing reasonable bridge loan rates and terms aligned with your business or investment goals.
The Bottom Line
Bridge loan rates are elevated in 2023, ranging from 9.5% to 12% on average. Investors and businesses seeking short-term financing face high borrowing costs thanks to rising benchmark interest rates.
While bridge loans can still be useful for strategic reasons, make sure you evaluate carefully and model out scenarios. Work with an expert broker to contain costs while still getting timely access to capital in today’s environment. Monitor Fed policy and economic trends, as the direction of rates will likely shift depending on macroeconomic developments this year.
Debt Service Coverage Ratio (DSCR)
DSCR is one of the most important indicators that lenders check. This measures your ability to repay your debt. DSCR is estimated by taking your property’s annual net operating income (NOI) and dividing it by the annual total debt service. Bridge loan providers usually require a DSCR of 1.1 percent to 1.25 percent.
Lenders check your financial records, including statements on all your principals. They evaluate these records to check your financial strength as an individual or group (if you have partners). If you are a group, they assess your collective net worth. Generally, lenders do not provide bridge loans that exceed an applicant’s total net worth.
Applicants and their partners must submit a company profile and business plan to the lender. This should demonstrate how much knowledge and experience you have in your field. Lenders also evaluate the strength of your business proposal, as well as similar projects you have completed successfully in the past. If you are a new business owner, this part may make it challenging to secure approval.
Get ready with the following documentation:
- Credit report
- Tax returns
- Business plan
- Company profile – including profiles of your associates
- Breakdown of renovation costs and schedule
- Detail your exit strategy (refinancing, selling, or other funding sources)
Qualifying for Commercial Bridge Financing
Commercial bridge loans are considered high-risk mortgages. This is due to the very short time frame given to borrowers to generate repayment. For this reason, interest rates for bridge loans are usually higher than traditional commercial mortgages.
Interest rates for bridge loans are generally based on the six-month LIBOR index and a spread of 4.5 – 5.5 points. But note that this estimate depends on the property and the lender.
Bridge Financing Interest Rates
Bridge loan interest rates typically range between 6% to 10%. Meanwhile, traditional commercial loan rates range from 1.176% to 12%. Borrowers can secure a lower interest rate with a traditional commercial loan, especially with a high credit score. However, that means enduring a long processing time of at least 3 months.
What do lenders look for? Approval for bridge financing is mainly based on the property and renovation plans. Lenders also evaluate the property’s real estate market before deciding to approve your loan.
Unlike traditional commercial lenders, bridge loan providers are not as strict with credit scores. You can obtain bridge financing if your credit score is below 680, but usually not lower than 650. Most lenders still check your credit report, but this is not the main basis for the loan’s approval. Checking your credit score merely verifies if you are qualified to refinance into a traditional commercial loan as an exit strategy.
As for down payment, lenders may require you to make a 20 percent to 30 percent down payment. This is similar to traditional commercial loans. However, depending on the lender, some may require higher down payment of 50 percent. So make sure you have enough funds to cover this cost.
When it comes to determining the loan amount, lenders evaluate a combination of the loan-to-cost (LTC) ratio and the loan-to-value (LTV) ratio. LTC is estimated based on the acquisition cost of the property along with the projected cost of renovation. Lenders typically offer loans with 65 percent to 80 percent LTC.
Furthermore, lenders also consider the after-repair-value (AVR) to determine the value of the loan. This includes the market value of the property once renovation is complete, together with the projected cash value generated by the completed property. Bridge loan lenders offer up to 80 percent LTV based on the property’s completed value.
Bridge loan lenders approve financing primarily on the basis of the after-repair-value (ARV). This percentage allows lenders to gauge the property’s future value over of its current price. This is in contrast to traditional commercial loans that lend based on loan-to-value ratio and creditworthiness.
Apart from ARV, bridge loan providers also assess the following qualifications:
What is a Bridge Loan and Why You Should Stay Away
FAQ
What is the typical interest rate for a bridge loan?
What is the interest rate on bridging loans?
Is it smart to get a bridge loan?
How is interest calculated on a bridge loan?
How much does a bridge loan cost?
Closing costs and fees for a bridge loan typically range from 1.5% to 3% of the total loan amount and may include: Variations in bridge loans are typically related to the wide range of terms that lenders extend based on factors like borrower creditworthiness and financing needs.
What is the interest rate on a bridge loan?
A **bridge loan** typically has an interest rate ranging between **9.5% and 12%**, depending on factors such as the asset, location, and loan terms.These loans are designed to provide short-term financing,
What happens if a bridge loan has a 2% interest rate?
While interest rates vary, let’s look at the implications of a bridge loan with an interest rate 2% higher than on a standard, fixed-rate mortgage. On a $250,000 conventional loan with a 3% interest rate, you might be paying $1,054 – an amount that would rise to $1,342 with a bridge loan that had a 2% higher interest rate.
Are bridge loans worth it?
Although bridge loans can be helpful for accessing the temporary funding that you need to purchase a new home, they often come with higher costs than other loan options. Interest rates for bridge loans tend to average around 2% higher than the prime rate.