The cost of a bridging loan is one of many factors that should be considered when deciding whether such a loan is a good option for you. The convenience of being able to borrow money at potentially short notice means a bridging loan can be an expensive form of borrowing, so the alternatives to a bridging loan will usually be worth considering too.
But in the right circumstances, if there’s a financial gap you need to bridge to help you buy a property, the higher costs generally associated with bridging loans might be worth paying.
Bridging loans can be a great solution when you need quick access to capital but like any loan they come at a cost. As you consider a bridging loan, it’s important to understand all the associated fees and costs so you can determine if it’s the right option for your situation.
Interest Rates
The primary cost of a bridging loan is the interest rate you’ll pay. Bridging loan rates are generally higher than rates for traditional mortgages and other long-term financing options Here’s an overview of typical bridging loan interest rates
- Base Rate: Most bridging loans are variable rate loans tied to a benchmark interest rate index like LIBOR. The base rate portion is usually LIBOR + 4.5% to 5.5%.
- Total Interest Rate: With the lender’s markup, total interest rates on bridge loans often fall between 6% to 10%.
- Higher Risk: Interest rates are higher for riskier loans or borrowers with lower credit. Rates above 10% are possible.
So if LIBOR is 3%, you can expect to see total rates ranging from around 9% on the low end up to 13% or more for a high-risk bridge loan.
Fees
In addition to interest, you’ll pay a variety of fees when taking out a bridge loan:
- Origination Fee: Upfront fee charged by the lender, usually 1% to 5% of the loan amount.
- Application/Processing Fees: Costs to apply and process the loan, often $500 to $1,000.
- Third-Party Fees: Appraisal, credit check, legal fees, and other costs passed on to the borrower.
- Closing Costs: Title insurance, recording fees, and other closing costs much like a traditional mortgage.
In total, fees typically add 2% to 5% to the cost of the loan on top of interest.
Early Repayment Charges
Many bridge loans include early repayment penalties if you pay off the loan before the full term. Expect to pay 1% to 3% of the outstanding balance if you refinance or sell the property ahead of schedule.
Loan-to-Value (LTV) Impact
The maximum loan amount you can borrow is tied to the appraised value of your property. The higher your desired loan-to-value ratio (LTV), the higher the interest rate you’ll likely pay.
Aim for a lower LTV if possible to reduce rates. Going above 80% LTV will increase costs substantially.
Credit Score Impact
Like any loan, your credit score is a primary factor impacting your bridge loan rate. The higher your score, the lower the rate lenders will offer.
Anything below 650 will result in sky-high rates, if you can even qualify. Prime bridge loan rates are only available to those with very good credit scores above 700.
Term Length
Shorter loan terms often mean higher rates. Most bridge loans run 6 months to 2 years. The longer you can extend the term – ideally at least 12 months – the more favorable the rate.
Loan Purpose
Investment or commercial uses typically have higher rates than residential bridge loans. Your intended use for the capital will affect the rate.
Collateral Quality
If you’re pledging your property as collateral, the less attractive it is to lenders, the higher rate you’ll pay. More desirable properties in good locations will help reduce rates.
Loan Amount
The more capital you need to borrow, the more risk for lenders. Don’t borrow more than you absolutely need, as larger loans mean higher rates.
Competition
Shop around with multiple lenders and negotiate aggressively. Competition for your business will ensure you get the best rate.
Alternatives
Also consider alternatives like home equity loans or lines of credit which may offer better rates. A bridge loan likely isn’t your only option.
Settlement Fees
You may face settlement fees and related title transfer costs when repaying the loan and transferring the property back from the lender.
Tips for Reducing Bridge Loan Costs
Here are some tips to help minimize the costs of securing a bridge loan:
- Seek out the longest term possible, ideally at least 12 months.
- Pay loan fees upfront rather than financing them into the loan.
- Buy down interest rates by paying points if cost-effective long-term.
- Only borrow what you absolutely require so you can optimize your LTV.
- Shop extensively and get quotes from at least 3-5 lenders.
- Work to boost your credit score before applying.
- Offer desirable high-value property as collateral.
- Seek competition from non-bank and alternative lenders.
- See if you qualify for a HELOC or home equity loan at lower rates.
Weighing the Costs vs. Benefits
Bridge loans can be costly, but also provide critical and rapid financing access when you need it. Carefully project your total costs using the info above and analyze if it’s worth the price to obtain the capital you require.
For large enough funding needs and an attractive exit strategy, bridge loan costs may be fully justified and worth the premium pricing. But in other cases, the math may not pan out favorably – be sure to run the numbers realistically before committing.
The type of bridging loan you need
Rates will differ according to whether you want the loan to help you buy a house, to purchase land or for business reasons. You can usually expect the rates charged on bridging loans on land and business bridging loans to be more expensive than if you want a bridging loan for a residential house purchase.
Bridging loan interest rates
Bridging loan interest rates can be either fixed or variable. A fixed rate can provide certainty, as you know what your repayments will be for the period of time, or term, that you have fixed. In comparison, variable bridging loan rates tend to be lower at the start, but could change, often in line with the Bank of England base rate. Therefore a variable rate has the potential to fall, resulting in lower repayments, but also the potential to rise, which could lead to higher repayments.
When looking at interest rates, it’s important to recognise that, unlike most credit options, bridging loans are priced on a monthly basis, as opposed to annually. This is because bridging loans tend to be for terms shorter than a year. If you see a bridging loan rate of 1% monthly, this is the equivalent of paying 12% annually.
When considered on a like-for-like basis, bridging loan rates will work out more expensive than those available on a standard residential mortgage.
How Much Does Bridging Finance Cost | BRIDGING FINANCE EXPLAINED | Property Education | Ste Hamilton
FAQ
How much would a $100,000 bridging loan cost?
How much is the bridging fee?
What is the typical interest rate on a bridging loan?
How much can I borrow for a bridging loan?
How much does a bridge loan cost?
Depending on the lender’s terms, you may make interest-only monthly payments, no payments until the home is sold or fixed monthly payments. Expect to pay 1.5% to 3% of the loan amount in closing costs for a bridge loan. Additionally, bridge loan rates can be as high as 6.99% to 8%, depending on your loan amount and credit profile.
How much can you borrow with a bridge loan?
3.**Borrowing Amount**: The amount you can borrow with a bridge loan varies widely.If you qualify, you could borrow anywhere from several hundred thousand dollars to more than $1 million .
Do all mortgage lenders make bridge loans?
Not all traditional mortgage lenders make bridge loans, but they’re more commonly offered by online lenders. Although bridge loans are secured by the borrower’s home, they often have higher interest rates than other financing options—like home equity lines of credit—because of the short loan term.
Why are bridge loans so expensive?
Bridge loans can come with a high price tag because you absorb a higher interest rate and the fees associated with an additional mortgage. There’s also the matter of how long a bridge loan is for. Since a bridge loan is short-term, you’ll have to pay it back quickly.