There are many costs to consider when taking out bridging finance. The first and most important is the bridging loan interest rate, usually expressed as a monthly rate. This rate when compared to other finance options will usually seem high, which is why bridging finance should only be used as a short term funding option.
It is also very important to consider all the other costs because they quickly add up. The best way to compare options and fully understand what a bridging loan is going to cost, is to add up all the interest charges for the period you are likely to have the loan and add this figure to all the other costs involved. Do this for each quote to compare bridging finance options.
Interest roll up
The monthly interest charged on a bridging loan can be paid monthly, but for most facilities there is an option to have the interest rolled up, retained or deferred, which means no monthly payments have to be made and the interest is paid at the end of the term when the loan is redeemed.
Facility fee (lender's arrangement fee)
Charged by the lender this typically ranges from 0 to 2% of the amount being borrowed and is included in the loan facility.
Some plans have an exit fee which is similar to the facility fee but charged and added to the loan when it is redeemed. Nearly all the bridging loans that we arrange do not have exit fees.
In addition to paying your own solicitor a bridging lender will also require you to pay their legal costs for setting up the facility. Legal fees can vary considerable depending on the lender.
Most lenders usually slip an administration fee into their agreements.
To set up most bridging loans a valuation will usually be required. In the absence of a suitable valuation/survey report we will need to arrange one. Although we will instruct the valuation, the surveyor or lender will contact you in order to take payment. Because valuations are carried out before a loan is completed this fee is not added to the loan facility, but is usually the only upfront fee. We ask our clients to pay the lender or surveyor directly for the valuation (they call you to take payment over the phone or a bank transfer) because we don't add anything to the valuation fee for ourselves.
We do not charge broker fees!
There are many bridging loan providers in the UK who between them provide a wide range of short term borrowing facilities. A common factor with most of these lenders is that the interest charged is based on a monthly rate of interest. This is mainly because of the short term nature of bridging loans where the money provided is usually only required for a period of months and not years. There are of course a wide range of monthly interest rates being charged, from as low as 6.8% per month to as high as 2% and above. In addition to certain lenders being much more competitive than others, the monthly interest rates charged on bridging loans will depend on a large number of factors:
Loan to value
The greater the amount of equity that is being provided by the borrower, means the smaller the risk to the lender. Therefore lower monthly rates of interest are achieved the lower the loan to value, when considering the value of the security compared to the amount being borrowed, plus any additional borrowing also charged on the security property.
Type of legal charge
There is less risk involved to a bridging lender if they are able to have first charge over the security property. Therefore the lowest interest rates are achieved when the lender has first charge. There are many facilities available when the security property is already being used to provide equity for another lender, typically a mortgage company. Taking a second charge behind another lender is a greater risk to a lender, and this usually reflected in a higher interest rate than if a first charge had been obtainable. There are also a very limited number of lenders who will provide a third charge, which due to their nature are more expensive again.
Type of property being used as security
This can be divided into 3 main categories, residential, semi-commercial and commercial property. The best security is provided by residential property and therefore this type of security preferred by the lenders and attracts the lowest monthly rates. Commercial property is a more risky proposition for lenders because values can drastically drop over a short period of time. This can clearly be illustrated by the number of empty or derelict commercial premises that have very little value today but were once very valuable. Semi-commercial property such as local shops with living accommodation above are considered to be less risky security than commercial property, but of a greater risk than residential property. The level of risk is reflected in the monthly rate of interest offered.
Condition of the security property
The high street lenders usually require any property being used as security to be in a reasonable condition and state of repair. Many bridging loan providers are happy to provide loans secured on property that would be deemed unacceptable security for most other lenders. The condition of the property and the amount of work that the property requires will influence the monthly interest rate offered.
Location of the security property
Some bridging lenders will only lend against property in London, whilst others will lend throughout the UK. Property in and around London is favourite and certainly command the lowest interest rates due to the increased completion amongst lenders keen to lend. Moving away from London sees some lenders withdrawing to the point that in Scotland there is a very limited number of bridging loan providers. Differences in the property law in Scotland, when compared to England and Wales, is also a factor.
Income and affordability
A lender will enquire about their customer's earnings and income to see if they are able to afford to pay the interest payments. This would apply to all customers including individuals who are employed, self employed or retired and also to businesses applying for a commercial bridging loan. An applicant's ability to comfortably make monthly interest repayments will of course be attractive to any lender, and will therefore help to attract the most competitive rates. It is however important to remember that being unable to make the monthly interest repayments does not necessarily exclude an individual or business from obtaining a bridging loan because facilities exist to add the interest to the facility so that it can be paid at the end.
The period for which the money is required will determine the rates available. Since most bridging lenders have a maximum term of 12 months there are more limited options for loans that are required beyond this term.
Most lenders want to see a reasonably good credit history. Therefore County Court Judgements, credit and mortgage arrears, defaults, IVAs and bankruptcies will signify a greater lending risk which will most probably mean an increased monthly rate of interest.
Cost and availability of funds to the lender
Interest rates for all types of lending are very much influenced by the price that the lender has to pay for their funds, and also the availability of funds. When lenders are low on funds they will tend to increase their rates, like most supply and demand situations.
It is important to remember that the monthly interest rate charge on any bridging loan is just one of the costs to consider. When comparing facilities attention should also be paid to arrangement fees, broker fees, administration costs, legal costs and fees, valuation fees, exit fees, redemption penalties and discounted rates that are only for a short period of time.