Factors that can influence bridging rates
The factors that influence bridging loan interest rates and costs with a list if LIBOR interest rates for UK, Europe and USA plus an explanation of LIBOR.
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 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.
Term – 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.
Credit history – 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.
Current Interest Rates
This page is kept up to date with a selection of interest rates, including:
- Bank of England Base Rate
- United States Federal Funds Base Rate
- European Central Bank Base Rate
In addition information is also provided for the LIBOR interest rates of the UK, USA and Europe. The LIBOR rates provided are for the following timescales:
- 1 week
- 1 month
- 6 month
- 12 month LIBOR rates
LIBOR interest rates explained
LIBOR is an abbreviation of the London Interbank Offered Rate, which is an interest rate measurement. The interest rate measured by LIBOR is the average amount of interest charged by the banks when they lend out their surplus money to each other. LIBOR interest rates are provided in 10 different currencies and for 15 different periods ranging from overnight to 12 months.
The LIBOR rate of interest is determined on a daily basis in London by the British Bankers Association, often referred to as the BBA. In order to determine the LIBOR rate of interest the BBA consult a group of large banks on the London money market, from which they take an average of the interest rate that they are each prepared to lend out their surplus money for. The LIBOR interest rate is announced each day at around 11.45am (UTC).
This is all a very important part of banking because the ability of banks to be able to lend to and borrow from each other enables them to be more functional. For example the banks that need money are able to borrow from the banks who have a surplus, clearly a help to the banks who require funds and also helpful to the banks who have a surplus because they can now earn some interest on that surplus.
Many lenders use LIBOR as their base rate when providing mortgages and other facilities to their customers. It is common to see rates set as a fixed percentage above the Bank of England Base Rate or the 3 month LIBOR rate. LIBOR is therefore watched very closely by both professionals and individuals because LIBOR interest rate rises and falls have a significant effect on a huge range of financial facilities including savings and mortgages.
Recently the 3 month LIBOR rate has been significantly higher which is in part due to the volatile market that has had the effect of making the banks to be less willing to lend to each other, and also because the demand for money is high. The high demand for money will naturally cause the cost (interest rate) to rise. More recently the 3 month LIBOR rate has started to fall which is good news for borrowers.
Page last updated on 14th November 2013