What are the Costs of a Bridging Loan?
, by Matt Stevens
When you need access to a large sum of money at short notice - whether to cover an unexpected financial gap or to secure a property before traditional funding is available - a bridging loan can provide a solid temporary solution.
However, these loans often come with high costs and a range of additional fees. In this guide, we’ll break down the key charges to watch out for and explain how you can get the most affordable deal.
Why would you take out a bridging loan?
Bridging loans are particularly beneficial for homeowners looking to downsize. If you’ve built up substantial equity in your current property but haven’t yet sold it, a bridging loan can help you secure your ideal new home before someone else does.
In such scenarios, the cost of a bridging loan can be a worthwhile investment, ensuring you don’t miss out on a property you intend to stay in for years to come. In fact, acting quickly with bridging finance could even save you money if it enables you to negotiate a better price.
For those purchasing a bargain at auction, tackling a major renovation project, or climbing the property ladder, bridging finance might not just be the best option - it could be the only way to access funds in time to seize the opportunity.
How much does a bridging loan cost?
1. Interest rate
One of the most significant costs associated with a bridging loan is the interest rate. Unlike standard residential mortgages, bridging loans tend to have much higher interest rates, usually ranging between 1% and 2% per month.
Bridging loans are designed for short-term borrowing, with repayment terms generally ranging from three to six months, yet some lenders offer terms of a year or longer. The longer the loan remains outstanding, the more interest accumulates, increasing the overall cost.
2. Deposit
When taking out a bridging loan, you’ll need to contribute a deposit towards the property purchase. The larger your deposit, the lower the interest rate you’re likely to secure.
Many lenders require a minimum deposit of 25% of the property’s value, implying they will lend up to 75% loan-to-value (LTV). Albeit, some lenders do offer higher LTV ratios, providing loans which cover up to 85% of the property’s value, depending on the circumstances.
3. Product fee
The majority of bridging loan lenders apply a product fee - also known as an arrangement or facility fee - for setting up the loan. This charge is usually calculated as a percentage of the total amount borrowed, typically falling between 1.5% and 3%.
For larger loan amounts, some lenders may reduce the product fee or do without it entirely. The exact fee structure varies between lenders, so it’s worth comparing options to find the most cost-effective deal.
4. Survey fee
Before approving a bridging loan, lenders will arrange a property valuation to assess its condition and guarantee it’s worth the amount you intend to borrow. This is a key step, given that the property serves as security for the loan.
Survey fees, also called valuation fees, differ depending on the property's value. Generally, the higher the property’s price, the more you’ll pay for the survey. Costs usually range from £250 to £1,000.
5. Redemption fee
Bridging loans are secured against a property, meaning they are registered as a legal charge. A redemption fee is used to cover the cost of removing this charge from the property’s title.
The fee is typically between £100 and £150, though exact costs depend on the lender. On top of this, bridging loan lenders often pass on their legal fees related to organising the loan, which can add to the overall cost.
6. Drawdown fee
When you access your bridging loan, lenders typically charge a drawdown fee - sometimes referred to as an assessment or admin fee. Again, the cost of this fee can vary depending on the lender, but it generally falls within the range of £300 to £500.
7. Exit fee
Bridging loans offer flexibility, allowing you to repay the loan early without incurring a penalty. That said, some lenders will impose an exit fee, usually ranging from 1% to 1.25% of the loan amount.
8. Telegraphic transfer fee
This administrative fee covers the bank charges associated with transferring the loan funds either to you or your conveyancing solicitor. Typically, the telegraphic transfer fee is around £25.
9. Broker fee
Working with a bridging loan broker or advisor is a smart choice. They can assist in finding the best deal, negotiate favourable terms on your behalf, and manage the often complex paperwork involved.
Usually, the broker’s fee is either a percentage of the loan amount, ranging from 0.5% to 2%, or a flat fee, depending on the arrangement.
When do you pay the charges for a bridging loan?
Many of the fees associated with a bridging loan can be added to the loan balance and paid at the end of the term. Still, bear in mind that you’ll be charged interest on these additional fees each month, which can make them more costly over time.
On the other hand, certain costs, such as survey, broker, and legal fees, must be paid upfront.
How is bridging loan interest repaid?
When it comes to repaying interest on a bridging loan, borrowers have three main options:
Monthly repayments - You can opt to pay the interest each month, ensuring that only the original loan amount remains to be repaid at the end of the term.
Deferred interest - Instead of making monthly interest payments, you can allow the interest to accumulate. It is then added to the total loan balance and settled in full when the term ends.
Retained interest - The lender calculates the total interest due for the entire loan term and adds it to the initial borrowing amount. This full sum is then repaid at the end of the term. If you repay the loan early, any unused interest is refunded.
It's important to note that if the property in question is your primary residence, the bridging loan will be regulated by the Financial Conduct Authority (FCA). However, if the property is occupied by someone who isn’t a family member, an unregulated bridging loan will be required.
With an unregulated loan, you have the flexibility to either pay the interest monthly or defer it. In contrast, for regulated loans, all interest is due at the end.
Stamp duty and bridging loans
When using bridging finance to purchase a second property, such as for buy-to-let purposes or if your previous buyer has unexpectedly withdrawn, you’ll be required to pay an additional Stamp Duty Land Tax (SDLT) rate.
This is an extra 5% on top of the standard Stamp Duty charge. Although, if you sell either property within three years of completing the purchase, you can reclaim this 5% surcharge.
How can I get a cheap bridging loan?
If you're buying a property before selling your current one, you might be able to secure a better interest rate by offering both properties as security. Providing a larger deposit and having a strong credit score can also help lower your rate. If you have bad credit, then you could face rejection and need specialist advice.
When using a property you already own as security, the size of your existing mortgage can affect your options. If you only have a small remaining mortgage on the property you want to use as security, taking out a second-charge bridging loan will generally come with a higher interest rate.
In some cases, it might be cheaper to get a larger loan which covers both the remaining mortgage and the purchase, as this may qualify for a lower first-charge rate. Keep in mind that second-charge loans typically have a lower LTV, so a larger deposit may be required.
The best option depends on your personal financial situation, so consulting a broker can help you evaluate your choices and secure the best deal at the most opportune time. Our team at The Mortgage Genie is ready to guide you through the process - call us at 01915809890 today.
