How much a bridging loan costs will depend upon the amount borrowed, the period of the loan term, interest rates alongside any arrangement fees or additional charges.
For example, the LTV ratio will either drive monthly interest rates up or down. The higher the equity a client has in a property, the more likely the lender will charge lower interest rates. In a similar manner, the type of legal charge the client chooses will impact the cost of the bridging loan. First charges tend to be the least risky, resulting in lower monthly interest rates.
Moreover, the type of property the client uses as security will affect the overall cost. Residential properties in comparison to commercial properties are less risky, mostly because the latter can devalue quicker, meaning lower monthly rates. The location and condition of the security property will also impact the bridging loan costs, with certain areas being more favourable, such as London.
Nonetheless, there are other factors which might influence how much a bridging loan could cost a client through bridging lenders:
Exit Fees: An exit fee simply means the borrower will have to pay a certain amount if and when they repay the bridging loan. Exit fees are not the same as Early Repayment Charges (ERCs) and can cost between 1 – 2%. You should always check the terms of any ERCs with your lender.
Facility Fee: Also known as a Lenders’ Arrangement Fee or Lenders’ Facility Fee, a facility fee varies between 1-2% of the overall bridging loan with most standard lenders.
Default Interest Rates: Lenders frequently have a default interest rate which is also referred to as a concessionary rate. This simply means if a payment is missed or late, or any other terms agreed between the client and lender are not adhered to, then a higher interest rate will apply. For instance, 2% per month may be the standard rate but an additional 1% could be added if any terms are not adhered to.
Interest Roll-Up: Typically, a bridging loan will have an interest roll-up arrangement which allows clients to pay all of the interest at the end of the term. This can prove cost-effective for some clients. However, some lenders may require interest to be serviced on a monthly basis.
Legal Fees: Similarly to a mortgage, a bridging loan will require a client to arrange their own solicitor as well as pay for the lenders.
Valuation Fees: Most lenders will charge a valuation fee which is based on the value of the property. The higher the value, the higher the cost.