Costs and Fees Associated with Bridging Finance

If you need to borrow a large amount of money quickly, perhaps to purchase an auction property or your buyer in a chain has dropped out, a bridging loan can be the right solution in these types of situations.

Typical bridging loan costs can be very high, however, as they come with a range of associated fees. This article will explain what charges to look out for, and how a broker can help you find the most cost effective option.

How much does a bridging loan cost?

The biggest factors affecting the costs involved with this type of finance will be the interest rate and the term, and these costs can vary depending on whether you need a bridging loan for a house purchase, to buy land or for commercial purposes.

Bridging loan terms can be as short as 3 to 6 months, although it’s possible to borrow bridging loans for as long as 24 or even 36 months. The longer you borrow the loan for, the more you will pay overall.

You can use our calculator below to get a rough idea of what your monthly payments could look like.

Our calculator is a good starting point for an estimate. However, as outlined below, there are other fees to take into account. Your individual circumstances and the structure of your bridging loan may also affect the cost. That’s why it’s advised to speak to a broker experienced in bridging loans to help guide you through the process.

Product fees

Nearly all bridging loan lenders will charge you a product fee (also called an arrangement fee or facility fee) for organising your loan. The fee is generally a percentage of the amount you’re borrowing. It can range between 1.5% and 3%, but is usually 2%. So if you needed to borrow £100,000, the product fee would be £2000.

If you’re borrowing a very large sum of money, the lender may charge a lower product fee, or waive the charge altogether.

Broker fees

While you could approach a lender directly, it is advised to work with a bridging loan broker who can help you find the right deal, negotiate on your behalf and deal with the complex paperwork.

The broker’s fee may be a percentage of the amount you intend to borrow, which can range from 0.5% to 2%, or it could be a flat fee.

It is best to avoid brokers charging high upfront fees, and instead work with a broker who charges on a success-only basis, meaning you’ll only have to pay if they successfully organise your loan.

Deposit

You will need to put down some money as a deposit on your property. The bigger your deposit, the lower the interest rate you will charge.

Most bridging loans will expect you to pay a deposit of at least 25% of the property’s value, meaning the loan will cover the remaining 75% of the cost to buy the property, but some borrowers will lend up to 80% or 85% loan-to-value (LTV).

It is possible to get a bridging loan for 100% of a property’s value, but usually a second property that the borrower owns is used as security for the loan.

Valuation & survey fees

Bridging loan lenders will want to inspect the property, to see that it is worth the amount you need to borrow and that it is in good condition in case they need to repossess it and sell it themselves if you fail to keep up with payments.

If you are using other properties or assets you own to secure the loan, the lender may charge multiple valuation fees for each asset.

These fees can vary. Usually, the more expensive a property, the higher the cost of the valuation survey. You can expect to pay between £300 to £900.

Drawdown fees

As well as the product fee, lenders will charge a drawdown fee (also known as an assessment fee or admin fee) to access your loan. This fee will vary from lender to lender, but you can expect to pay around £500.

Redemption fees

This is another administrative fee charged by lenders. Bridging loans are recorded as a “charge” against a property, and the redemption fee relates to removing this legal charge from your property. It is usually around £100 to £150.

Exit fees

Bridging loans are highly flexible, and you can pay them off early without paying a penalty. However, some lenders will charge an exit fee of around 1% of the borrowed loan when it is repaid.

Solicitor fees

As well as your own solicitor costs relating to buying a property, bridging loan lenders will pass on their legal fees to you related to organising your loan.

Transfer fees

Yet another administrative fee, this one covers the bank charges involved in transferring the funds from the lender to you or your conveyancing solicitor. This will be around £25.

When do you pay these fees?

Most of these fees can be rolled into the loan and paid at the end of your term. This is usually more convenient for you, but remember you are then paying interest on these extra fees each month, so will be more expensive over time.

However, you will need to pay these particular fees upfront:

• The survey/valuation  fees
• The legal fees
• The broker’s fees (unless you opt for a broker charging on a success-only basis)

What are the interest rates?

Take a look at our rates table below to get an idea of the bridging loan deals currently available. Note that these are monthly rates, not annual. A bridging loan charging 1% interest per month, for example, will cost 12% over a year.

Please note that the rates above are for example purposes, were correct at the time of writing and are subject to change at the lender’s discretion.

Bridging loan interest is much more expensive compared to a typical residential mortgage, which will have an annual interest rate of between 1% to 2%.

As an example, someone borrowing £200,000 on a property worth £250,000 at 0.79% interest from Lendinvest would pay £1612 per month.

There are other factors affecting interest rates. Lenders may charge higher interest rates if the property is in poor condition (perhaps because it is damaged or dilapidated).

The location of the property will also have an impact: a property in a popular area where it is easier to sell may attract a lower interest rate.

How bridging loan interest is repaid

Another factor to consider is how you want to manage your interest payments. Bridging loans are highly flexible, so it’s possible to choose a repayment option that better suits your situation:

• Monthly repayments: You can choose to pay off the interest each month, so you’ll only have to repay the original borrowed balance at the end of the term.
• Rolled-up/deferred interest: Instead of making monthly payments, you can choose to defer your interest charges. The interest is then added to your balance each month and the total is paid off at the end of the term.
• Retained interest: The lender calculates how much interest you would pay over the full term of the loan, and adds this to your balance. You then repay the total at the end of the term. If you repay the loan early, the additional assumed interest is refunded.

Which type of repayment is best for you will depend on your circumstances and what you’re trying to do. A bridging loan broker can give you advice and help you decide what is right for you.

How to get a cheap bridging loan

While you could use a comparison website and simply look for a bridging loan with a low interest rate and product fee, this may not be the cheapest deal available. That’s because comparison websites may not list all of the additional charges listed in this guide, and some lenders may not be included on these websites.

Also, there are other factors that might be important to you. For instance, the cheapest bridging loan provider may not be able to turn around your finance as quickly as you need it.

For these reasons, it is best to speak to a broker experienced in arranging bridging loans to help you find the best, cheapest deal for your situation.

The brokers we work with have access to the entire market, including lenders you won’t find on the high street. They are able to help you compare lenders based on factors beyond just the interest rate.

For instance, if you have bad credit, you may be rejected by some lenders. An expert mortgage advisor can help direct you to lenders who are more likely to look favourably on your application, and avoid further marks on your credit history.

Our broker matching service can pair you with an advisor best suited to your situation. For a fee-free chat with no obligation to proceed, call us today on 0808 189 2301 or make an enquiry online.

Are the fees any different if you’re buying a house?

Bridging loans can be used for all sorts of purposes, including buying land, commercial property, or an investment like a buy-to-let property. There are a few differences in the costs which are applied if you’re buying a house.

Regulated or unregulated

Bridging loans can be regulated by the Financial Conduct Authority (FCA) or unregulated. Generally, bridging loan fees will be the same in both cases, but how you apply to them will differ.

Stamp Duty

If you already own a property and are using bridging finance to buy a second property, whether as an investment or because the person who was going to buy your property has pulled out at the last minute, then you will need to pay the higher Stamp Duty Land Tax rate.

You will need to pay an additional 3% of the property’s value on top of the normal Stamp Duty rate, which is calculated on a sliding scale of 0% to 12% based on the value of the property. You can use an online calculator to work out how much tax you will have to pay.

Fortunately, the additional Stamp Duty is refundable if you sell either property within three years of completing your purchase.

First or second charge

Fees for first and second charge loans are generally the same, but the maximum LTV for a second charge bridging loan is typically 5% lower than compared to a first charge, meaning you may need a larger deposit.

Get matched with a bridging loan broker

Arranging a bridging loan can be complex, especially as there are many extra fees to keep track of and different ways to structure your loan.

As such, speaking to a broker who can help you arrange the best deal that is right for your circumstances and take the pain out of paperwork can prove to be invaluable.

To speak to an experienced bridging loans broker, call today on 0808 189 2301 or make an enquiry online to arrange a free, no obligation initial chat.