When determining whether a bridging loan is the right choice for you, there are a number of things to take into account, including the cost of the loan. A bridging loan can be an expensive form of borrowing due to the convenience of being able to borrow money at potentially short notice, so it is usually worthwhile to look into alternatives.
However, in certain situations, if you need to close a financial gap to help you purchase a home, it might be worth it to pay the higher fees linked to bridging loans.
Are you considering a bridging loan to overcome a financial hurdle? Understanding the true cost of this financing option is crucial before diving in. This comprehensive guide will unveil the hidden expenses associated with bridging loans, including interest rates, fees, and other charges, empowering you to make informed decisions.
What is a Bridging Loan?
A bridging loan is a short-term financing solution that bridges the gap between two financial events. It’s typically used when purchasing a new property before selling your existing one, allowing you to avoid losing your dream home. Bridging loans come in various forms, including:
- Residential bridging loans: Used for purchasing a new home before selling your current one.
- Commercial bridging loans: Used for business purposes, such as acquiring new assets or bridging cash flow gaps.
- Development bridging loans: Used for funding property development projects.
Unveiling the Cost of Bridging Loans:
1, Interest Rates:
Bridging loan interest rates are notoriously higher than traditional mortgages, ranging from 1.5% to 3% per month. This translates to an annual percentage rate (APR) of 18% to 36%, significantly exceeding the rates for standard mortgages. The exact rate you’ll secure depends on factors like your credit score, loan-to-value ratio (LTV), and the desired loan term.
2. Fees and Charges:
Bridging loans are accompanied by a plethora of fees, adding to the overall cost. These include:
- Arrangement fees: Typically 2% of the loan amount, covering the lender’s administrative costs.
- Valuation and survey fees: Varying based on property value and survey complexity.
- Drawdown fees: Charged when accessing the loan, ranging from £200 to £500.
- Redemption fees: Payable upon loan repayment, usually around £100 to £150.
- Exit fees: Charged upon loan repayment, ranging from 1% to 2% of the loan amount or one month’s interest.
- Legal fees: Covering solicitor costs for both the lender and borrower, often reaching four figures.
- Broker fees: If using a mortgage broker, expect a flat fee or a percentage of the loan amount (up to 2%).
- Telegraphic transfer fees: Around £25 for bank transfer charges.
3. Hidden Expenses:
Beyond the obvious costs, several hidden expenses can inflate the total cost of a bridging loan:
- Interest on fees: If fees aren’t paid upfront, they’re added to the loan amount, accruing interest.
- Early repayment charges: While uncommon, some lenders impose penalties for early loan repayment.
- Default charges: Failing to repay the loan on time results in hefty late payment fees.
Minimizing the Cost of Bridging Loans:
1. Shop Around:
Comparing offers from multiple lenders is crucial for securing the most competitive rates and terms. Don’t settle for the first offer you receive; explore your options to find the best deal.
2. Improve Your Credit Score:
A higher credit score translates to lower interest rates. Focus on improving your credit score before applying for a bridging loan to minimize borrowing costs.
3. Keep the Loan Term Short:
The longer the loan term, the more interest you’ll accrue. Opt for the shortest possible term that aligns with your financial situation.
4. Negotiate Fees:
Don’t hesitate to negotiate fees with lenders. While some fees are non-negotiable, others may be reduced or waived, especially for larger loan amounts.
5. Consider Alternatives:
Explore alternative financing options like personal loans, credit cards, or equity release before committing to a bridging loan. These options may offer lower interest rates or fees, depending on your circumstances.
6. Seek Expert Advice:
Consulting a financial advisor or mortgage broker can provide valuable insights and guidance throughout the process, ensuring you make informed decisions and secure the most suitable bridging loan for your needs.
Remember: Bridging loans are a valuable financial tool, but they come at a cost. By understanding the associated expenses, including interest rates, fees, and hidden charges, you can make informed decisions and minimize the financial impact of this financing option.
The loan to value (LTV) you’re borrowing at
Bridging loan rates typically decrease in proportion to the value of the property you’re borrowing against, much like mortgage rates do.
Bridging loan interest rates
Bridging loan interest rates can be either fixed or variable. Since you are aware of your repayment obligations for the duration of the fixed rate, or term, you can feel more certain. Variable bridging loan rates, on the other hand, are typically lower initially and may fluctuate, frequently in tandem with the Bank of England base rate. As a result, a variable rate may decrease and result in smaller repayments, or it may increase and result in larger repayments.
It’s crucial to understand that, in contrast to most credit options, bridging loans are priced monthly rather than annually when examining interest rates. 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.
Bridging loan rates will prove to be more costly than those offered by a typical residential mortgage when compared like-for-like.
What is a Bridging Loan? How Does Bridging Finance Work?
FAQ
How much is the bridging fee?
Is it a good idea to get a bridge loan?
Do you have to make payments on a bridging loan?
What is the difference between a bridge loan and a gap loan?