MFS are a bridging loan and buy-to-let mortgage provider, not financial advisors. Therefore, Investors are encouraged to seek professional advice. The information in this content is correct at time of writing.
After serval years in the industry, one common question we hear a lot is – how much does a bridging loan cost?
Whilst this isn’t a ‘one-answer-fits-all’ question, we’ve provided a list of everything that you need to consider before arranging a bridging loan, including:
Taking out a bridging loan can be a great way to secure short-term financing while you arrange longer-term funding. But like any loan, bridging loans come with costs. So how much does a bridging loan really cost? In this comprehensive guide, we’ll break down the various fees and charges associated with bridge loans so you can determine if it’s the right financing option for your needs.
First, let’s make sure we’re all on the same page about what a bridging loan actually is A bridging loan is a short-term financing option, usually lasting from a few months up to a couple years It allows you to “bridge the gap” between buying a new property and securing permanent financing for that property.
Bridging loans are commonly used in real estate transactions when a buyer needs to purchase a new home before selling their existing property The loan provides urgent financing so the buyer can complete the new home purchase, then pays off the loan once their old home sells
But bridging loans aren’t just for individuals. Businesses also use them as a source of fast, interim financing when longer-term business loans would take too much time to acquire. For example, a company could utilize a bridge loan to purchase a new commercial property or equipment while they wait for approval on a traditional bank loan or SBA financing.
Now that we understand what bridging loans are, let’s look at what factors influence their cost.
Interest Rates
The interest rate is one of the biggest drivers of overall loan cost. Bridging loan rates are generally higher than rates for conventional mortgages and long-term business loans. This is because they carry more risk for the lender due to their short-term nature.
Typical interest rates for bridging loans fall in the range of 6% to 10% or more. By comparison, 30-year fixed-rate mortgages currently average around 6%, while conventional small business loan rates can range from 5% to 8%.
As you can see, the interest rate premium for a bridge loan can be substantial. On a $500,000 loan over 12 months, that translates to $25,000 to $50,000 in added interest charges versus a traditional mortgage.
Several key factors impact what interest rate you’ll pay on a specific bridge loan:
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Credit score – Borrowers with higher credit tend to qualify for lower rates.
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Loan-to-value ratio – The ratio comparing your loan amount to the property’s value. Higher LTVs equate to higher rates.
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Loan purpose – A bridge loan for a business purpose often carries a higher rate than for real estate.
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Loan term – Shorter term loans generally have higher interest rates.
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Overall market conditions – When money is tighter, rates increase across the board.
So when evaluating bridge loan rates, be sure to shop around and compare quotes from multiple lenders. Even a small rate difference can save you thousands over the loan term.
Origination Fees
Along with interest charges, the origination fee is a cost to be aware of with bridge loans. This upfront fee is charged by the lender to initiate and process the loan. It’s typically 1% to 5% of the total loan amount.
For example, a $300,000 bridge loan with a 3% origination fee means a $9,000 fee due at closing.
As with interest rates, origination fees vary by lender. Banks and direct lenders tend to charge lower fees, while private money and hard money loans have higher origination costs.
The origination fee gets tacked on to the loan balance, so you’ll pay interest on it over the loan term. You can opt to pay discount points to reduce the interest rate and long-term costs. Overall, origination fees are one of the largest upfront costs of a bridge loan.
Appraisal Fees
Lenders want to verify the actual market value of the property or asset being used as collateral for a bridge loan. This requires an appraisal by a professional appraiser, typically costing $300 to $500 for a single family home.
On larger commercial properties and apartment buildings, appraisal fees can run into the thousands. While not technically required, an appraisal protects the interests of both borrower and lender, so expect most lenders to mandate one.
Credit Check Fees
As part of underwriting any loan, the lender runs credit checks on all applicants. Hard inquiries into your credit typically cost $10 to $20 each at the three major bureaus.
So on a bridge loan with two co-borrowers, budget around $60 for the credit check component. Not a deal breaker expense, but one to be aware of.
Title Fees
There are costs associated with transferring the title and recording liens when using real estate as collateral on a bridge loan. Common title-related fees include:
- Title search – $100 to $200
- Lien recording – $50 to $150
- Title insurance – 0.5% to 2% of loan value
For a $200,000 bridge loan secured by a property, title charges can easily total $2,000 or more. Title insurance is optional but highly recommended to protect against errors and omissions in the title.
Legal Fees
Drawing up contracts and loan documents customized for each bridge loan transaction involves attorney fees. Borrowers pay their own legal fees, while the lender covers their side.
A simple bridge loan can incur $500 or less in legal fees, while complex commercial loans run $2,000 and up. It’s smart to budget 1% to 3% of the loan amount to cover legal costs.
Prepayment Penalties
One potential hidden cost to watch out for are prepayment penalties with bridge loans. Some lenders impose these fees if you pay off the bridge loan early, either through selling the property or refinancing.
Typical prepayment penalties equal 1% to 3% of the remaining loan balance. So it’s wise to ask about prepayment policies upfront before signing your bridge loan documents.
Third-Party Fees
In some cases, bridge loans are sourced through a loan broker who facilitates connecting borrowers with lenders, similar to a mortgage broker. These intermediaries charge their own fees for service, anywhere from 1% to 5% of the loan amount.
Using a broker can expand your lender network, but comes with extra costs. Be sure to find out if a broker fee applies when shopping for a bridge loan.
Repayment Flexibility
A key but indirect cost factor on bridge loans is repayment flexibility. If your exit strategy to repay the loan falls through, some lenders will allow you to extend the term or refinance into a longer maturity loan.
Others charge hefty fees or even call the loan immediately due if you can’t repay as originally scheduled. Be sure to understand options and penalties for repaying later than planned.
Total Costs Quickly Add Up
As we’ve covered, the costs beyond just the interest rate can really make bridge loans an expensive source of financing. From origination fees to third-party charges, total fees on a $500,000 bridge loan can easily exceed $15,000 to $20,000.
And that’s not even counting extra interest costs which run tens of thousands more compared to traditional mortgages and business loans.
Strategies to Reduce Bridge Loan Costs
If you’ve determined a bridge loan is your best or only financing option, here are some tips to contain costs:
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Shop around – Compare quotes from multiple lenders to find the best rates and overall value.
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Negotiate fees – Don’t be afraid to push back on excessive fees and charges to get them lowered.
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Improve credit – Boost your credit score to qualify for lower interest rates.
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Shorten term – Choose the shortest term possible you’re comfortable with to minimize interest.
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Pay points – Consider paying points to buy down the interest rate.
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Avoid brokers – Work directly with lenders instead of through brokers to avoid intermediary fees.
Weigh the Benefits Against Costs
There’s no denying bridge loans carry higher costs compared to conventional mortgages and business loans. Make sure to carefully assess both the benefits and the expenses to determine if a bridge loan is your most cost-effective option.
Crunching the numbers can help you decide if the urgency and flexibility of a bridge loan outweighs the premium rates and fees. Examining costs in-depth equips you to make an informed financing decision for your real estate or business needs.
Additional fees you need to know:
Lenders may also have additional fees that can have an impact on how much a bridging loan costs:
Arrangement fees can be charged by lender but could also be levied by a broker, should you choose to use one. Typically, these one-off fees cost around 1-2% of the total borrowed amount.
As a standard part of the initial due diligence, a lender needs to establish the value of the property it is lending against. Some lenders might charge valuation fees to cover the cost of this process.
Some lenders might charge an exit fee once the loan is repaid, which can increase the cost of a bridging loan overall. For most lenders, these fees are charged at around 1%.
Some lenders will also charge early repayment fees, should the borrower wish to repay the loan earlier than expected. This can also impact the total cost of a bridging loan. We do not have any early redemption charges (also known as ERC) here at MFS.
Loan to Value (LTV)
When calculating the cost of a bridging loan, borrowers must have a clear idea of how much money they are borrowing when compared to the value of the property. This measurement is known as the Loan-To-Value (LTV) ratio. It is usually conveyed as a percentage.
Typically, the higher an LTV ratio, the bigger the risk is to the lender. As such, borrowers with low LTV ratios are more likely to be offered more favourable terms for their loan; such as lower monthly interest rates.
If a borrower is purchasing a property worth £500,000 and provides a deposit of £250,000 – their LTV would be 50%.
How Much Does Bridging Finance Cost | BRIDGING FINANCE EXPLAINED | Property Education | Ste Hamilton
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.
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.
What is a bridge loan?
Here’s an explanation for Bridge loans are short-term loans that help cover costs during transitional periods, most often the time frame between buying and selling a home. Like a mortgage, you might need to put your home up as collateral for a bridge loan. Some bridge loans allow you to pledge other assets instead.
How do I use a bridge loan?
The most common way to use a bridge loan is for closing costs. You can apply for a bridge loan with a lender. Although terms may vary, it’s standard to borrow a maximum 80 percent of both your home’s value and the value of the home you wish to buy.