Why Are Bridging Loans Expensive?

A bridging loan offers a fast, temporary, and interest-only solution to short-term capital. However, when you should use one, whom it would suit, and how it works may be less clear for you when you take out such a loan for the first time. To determine how much a bridging loan costs, it is vital to know all the additional charges. These charges vary from lender to lender and depend on the terms negotiated. 

As bridging loans are short-term, they are quoted monthly rather than annually, so it is important to remember this. Unlike other types of financing, such as a mortgage, which is characterised by an annual interest rate, this kind of financing is purchased monthly.

Here we will explain the costs associated with bridging loans so that you can understand why bridging loans are expensive. 

 Are Bridging Loans Expensive? 

Since bridging loans are often a short-term solution until you find permanent funding, they are frequently used to maximise profit in the long run despite their high-interest rates and fees.

Bridging loans last only a few weeks or months, so they have a high-interest rate in comparison. Rates on bridge loans typically range from 0.75% to 1.95%, the same as taking out a mortgage with 9% interest.

Bridging lenders charge an interest rate in one of the following ways: 

Monthly:

Interest is charged monthly and not added to the loan balance. 

Retained:

In addition to the original bridge loan, the interest owed is also borrowed. This total amount is then repaid at the end of the term.

Rolled Up:

When the original loan is repaid, interest is rolled up each month and paid at the end of the term.

Lenders are becoming more flexible as the bridging loan industry becomes more competitive, allowing a combination of repayment options.

As you can see, bridging loans are not cheap, but they allow you to close profitable deals that may otherwise have been impossible.

Bridging Loans Fees 

The most expensive part of a bridge loan is often the fees that apply in addition to the interest rates.

A bridging loan broker can shop around and negotiate the best loan on your behalf since lenders charge different fees. Types of fees you can expect to pay to include:

Arrangement fee:

Bridging lenders charge this fee for setting up a loan on your behalf. Typically, it is 1-2% of the loan amount.  

Administration fee:

The cost associated with the paperwork processing of your bridging loan. 

Legal fee:

It is normally a fixed amount that covers solicitor fees and legal costs for both you and your lender.   

Exit fee:

It is a fee that you have to pay when you repay the loan amount early. It is usually 1% of the loan amount, but all the lenders do not charge this fee.  

Valuation fee:

It covers the fee of the surveyor who carries out a valuation of your property.

Broker fee:

If you take out bridging finance through a broker, you have to pay a broker fee, usually calculated as 1% of the loan amount.   

When calculating the loan amount, you must remember all the above fees because they add up to the loan amount, making it an expensive way of borrowing. 

How Much Can You Borrow With A Bridging Loan? 

There isn't a set limit on how much you can borrow with a bridge loan, so it's up to the lender's assessment. But it makes sense that lenders with the lowest prices would require greater guarantees.

Although a personal loan might be more suited, bridging loans can range from £5,000 to £250 million in amount. The lender decides how much you can borrow for a bridging loan, and it almost always depends on the properties offered as collateral.

Therefore, you will likely find the rates considerably more competitive if you have expertise in borrowing money and only need to borrow up to 50% of the property's value.

How To Get An Inexpensive Bridging Loan? 

After finding that bridging loans are expensive? The next logical question is, "how do you secure the best and lowest bridging loan for your needs?

Therefore, it's crucial that you weigh your options and have a thorough understanding of the product you're applying for. This is crucial for bridging loans, which can provide quite specialised solutions.

By using a broker, you can make some progress toward locating a low-cost bridging loan that will fit your particular financial requirements. However, choosing the correct lender is equally important because it can significantly affect how expensive a bridging loan is.

Brokers are aware of this and frequently bring their clients back to us. They are aware that our quickness and adaptability can benefit borrowers the most.

In addition, you can easily find bridging loan deals at affordable rates when you have a valuable property to use as collateral, a strong exit strategy, and a good credit score. 

Conclusion 

Due to their high-interest rates and costs, bridging loans are frequently used as a temporary method of raising funds. Bridge loan interest rates normally vary from 0.75% to 1.95%, which is comparable to a 9% interest mortgage. Other charges, such as an arrangement fee, administration cost, legal fee, exit fee, valuation fee, and broker fee, may also be applicable in addition to interest. 

Also Read: The Financial Advisor’s Guide to Peer to Peer Lending

A bridging loan's borrowing capacity varies and is determined by the lender's evaluation of the collateralised properties. Consider dealing with a broker that can assist you in finding lenders in order to shop around and negotiate with them to acquire the best and cheapest bridging loan.