How Much Does Bridging Finance Costs?
Bridging loans are fast becoming one of the popular ways to raise finance to complete a property purchase, renovate a home or overcome cash flow issues in business. They are a short-term finance solution, which enables homeowners and businesses to access the funds they need to bridge a funding gap and seize profitable opportunities. People in mind, how much does bridging finance cost?
If you are considering using bridging finance for your next home purchase or commercial project, it is important to understand the cost associated with accessing the loan. Free bridging loan Calculator may seem like a complex task, but understanding the primary factors involved can help you make wise decisions. In this post, we will dive into the intricacies of bridging finance calculations, providing you with the knowledge you need to go through this complex process smoothly.
Key Factors Involved in Bridging Loan Calculations
#1 The loan amount – The loan amount directly influences the overall cost of the bridging loan. The larger the loan amount, the higher the interest payments and associated fees will be.
#2 The loan-to-value ratio (LTV) – The LTV refers to the percentage of funds you want to raise against the value of your property. Usually, higher LTV ratios are associated with higher interest rates because they pose a higher risk to the lender.
#3 The loan term – The loan term is the duration for which you need the loan. Shorter bridging loan terms have lower total interest costs, while longer terms typically incur higher interest rates.
#4 Borrower’s credit profile – A borrower with a clean and strong credit history may secure a bridging loan at a lower interest rate and other fees, while those with a poor credit history may incur higher interest rates.
#5 Condition and type of the property – The condition and type of the property used as security can influence the total loan cost. A property in good condition may help you secure favourable rates and terms.
Costs Affecting Bridging Loan
Bridging loans come with several other fees besides interest rates, which can vary from lender to lender, the borrower’s credit history, the type of property involved and the loan terms. Here are some costs that you can expect with bridging loans.
#1 Interest Rates
Interest rates are the main cost that can affect the overall loan amount. It is the amount that you pay as interest for accessing the loan. The interest rate can vary depending on the loan amount, borrower’s credit history, LTV ratio and other factors. There are three ways a lender can charge interest.
Monthly Interest – The interest is calculated beforehand and paid off each month. It is not added to the loan amount. For instance, if you borrow £100,000 at 1% interest rate, then you are supposed to pay only £1,000 every month. The capital loan amount is paid at the end of the term.
Rolled-up Interest – The interest is added to the loan amount and paid at the end of the loan term. For instance, if your loan amount and interest is £100,000 and £1,000 respectively, the total owed would be £101,000 at the end of the first month.
Retained Interest – The interest amount is calculated beforehand based on how long you are borrowing, and it is paid at the end of the term. For instance, if you are borrowing £100,000 at 1% interest rate for 6 months, the total amount you are supposed to pay at the end of 6 months would be £106,000.
As bridging loans are short-term loans and paid off within several months, the interest is calculated every month rather than annually. While considering interest rates for bridging finance, an average interest rate of 1% is good to keep in mind. This rate can go up to 2% for borrowers with high-risk projects or poor credit history.
#2 Lender Arrangement Fees
A lender arrangement fee in a bridging loan is a fee imposed by the lender for setting up the loan. This fee includes the administrative cost of processing loan applications, evaluating the borrower’s financial circumstances and preparing necessary documentation. Typically, the fee is a percentage of the loan amount, ranging from 1% to 2%. This fee is either added to the loan or paid up front, influencing the overall cost of the loan.
#3 Valuation Fees
Before the lender processes your bridging loan application, a professional valuation must be conducted of the property that is being used as collateral against the loan. A valuation fee is paid to a professional surveyor to assess the property’s worth. The cost of the valuation depends on the surveyor, the value of the asset, its location and the level of valuation required. However, you can expect to pay between £500 and £2000 for commercial properties. Since the valuation is carried out before the loan is granted, this fee is paid directly to the surveyor.
#4 Legal Fees
Legal fees associated with bridging loans include solicitor fees and redemption fees. Both lender and borrower will incur legal costs for creating and reviewing the loan contract and other documentation. The lender may also carry out legal due diligence and expect the borrower to pay the fee. These fees vary depending on the solicitor’s rates and the complexity of the loan, but you should expect to pay around £1000.
#5 Broker Fees
The borrower may be charged a broker fee if the broker is used to find and secure the bridging loan. The broker fee is based on the level and complexity of the work, but you can usually expect to pay 1% of the total loan amount. This fee is either added to the loan or deducted from the gross loan value. Choosing an experienced broker is essential as he will work tirelessly to help you find the best deal and save you money overall.
#6 Exit Fees
Some lenders charge an exit fee when the bridging loan term ends, which is usually 1 or 2% of the loan amount or equal to one month’s interest. This fee is added to the loan and paid at the end of the term.
Keep in mind that if your exit strategy does not work out as planned and you wish to extend the loan agreement, you will be liable for additional charges.
Conclusion
Bridging loans can be a powerful tool in bridging financial gaps in many circumstances. Understanding these costs can often be complex, which is why it is advisable to consult London bridging finance experts. A bridging loan specialist will help you navigate through various factors involved, compare deals from different lenders and secure the most desirable terms based on your specific needs.
