Ready to master bridging loan costs?
If you’re a property investor or a homeowner facing short-term finance requirements, it’s crucial to have a clear understanding of the true cost of bridging loans. After all, landing the wrong deal can quickly cost you thousands in unnecessary interest payments. That’s why this guide is going to break it all down for you. Here’s what you need to know…
The problem
Bridging loan interest rates can be confusing and, if you’re not careful, can land you with a very expensive surprise. Unlike traditional mortgages, which are quoted as annual percentages, bridging loans work differently.
Without the right information, you’ll end up overpaying.
Here’s what you need to understand about bridging loan interest rates and repayment options.
What you’ll discover:
- The hidden facts behind bridging loan interest rates
- The true cost of various repayment options
- The current market rates and what they really mean
- Proven strategies for reducing your interest costs
How bridging loan interest rates actually work
Unlike traditional mortgage interest rates, bridging loan interest rates are quoted differently. That’s because bridging loans are designed to be used for short periods of time, typically between 6 and 18 months. As a result, rather than quoting annual rates, lenders quote you a monthly percentage.
Current bridging loan rates range from 0.4% to 2% per month. While that may not seem like a lot, when annualised it works out to 4.8% to 24% interest per year. The average rate is currently about 0.72% per month which works out to 8.64% per year. Don’t sweat it – the key thing to remember is you only pay the interest for the months you’re using the loan.
Want to quickly see what a bridging loan will cost you? Use a bridging loan calculator to get accurate figures for your situation in seconds. Simply head over to www.bridgeloandirect.co.uk/bridging-loan-calculator to get started.
Factors that influence the rate
Several factors can affect the exact rate you pay, including:
- The loan-to-value ratio (LTV)
- The type of property
- Your exit strategy
- Your credit history
Lenders view certain situations as riskier than others and will charge higher interest rates to compensate. For example, if you have a low loan-to-value ratio, you’ll be offered better rates. Residential properties typically get lower rates than commercial ones. If you have a clear plan for repaying the loan, lenders view you as less risky. And, of course, if you’ve got a strong credit history, you’re in a better position to negotiate.
The good news is that unlike with a mortgage, you can often negotiate on bridging loan rates.
Three ways bridging loan interest gets charged
Interest can be charged in three main ways:
Monthly interest payments
Interest gets added to your loan balance each month and is repaid along with your capital.
It’s best for borrowers who have steady income or repayments they can afford.
Rolled-up interest
Rolled-up interest gets added to your loan balance each month, so you don’t make any repayments until the end.
It’s best for developers or others who don’t have immediate income from the property.
Retained interest
The lender “retains” enough money to cover all the interest for the full term. You get less money upfront but don’t have any payment concerns.
It’s best for short-term deals where borrowers want fixed costs.
The big numbers the market is giving us
The bridging loan market is booming.
According to recent research, the UK bridging loan market is set to hit £10.9 billion by the end of 2024 with expected growth of 25% over five years.
The main drivers? Rising house prices and slow processing times are making more and more people turn to bridging finance.
Average completion times of just 32 days is another big plus.
However…
Interest rates have been on the rise.
Where bridging loan rates were in the 7% to 9% range prior to the pandemic, they’ve been on the rise.
The real cost of different loan types
Not all bridging loans are equal. Closed v open, first charge v second charge.
Let’s break it down and see where you can save serious money.
Closed v open bridging loans
Closed bridging loans have a specific guaranteed exit date.
Because the lender knows exactly when they’ll get their money back, the rates tend to be lower.
Open bridging loans have no set exit date. The additional uncertainty means higher rates for the lender.
First v second charge bridging loans
First charge bridging loans are secured as the primary debt against a property. As a result, they typically come with the lowest rates.
Second charge loans sit behind an existing mortgage. The additional risk means the lender charges higher interest rates.
Bridging loan interest reduction strategies
If you want to pay less interest, the following strategies have been proven to cut costs:
Exit fast, exit smart
Remember you only pay interest for the months you actually use the loan.
If you can potentially need 12 months but only use 6, you can save a fortune.
Most lenders don’t charge early repayment penalties, so the best way to save money is to have a rapid exit strategy.
Shop around aggressively
Rates can vary significantly between different bridging lenders.
As lenders specialise in different types of property, you may be able to get a much better deal elsewhere.
Don’t just look at interest rates, though. Consider all the fees, from arrangement costs and valuation to legal and exit fees.
Pay attention to your loan to value
Lenders offer lower rates for lower loan to value ratios almost every time. If you can raise your deposit, it may well be worth it.
For example, a reduction in LTV from 75% to 65% could see you save 0.2% per month.
Use a specialist broker
Bridging loan brokers have access to a network of lenders you can’t approach as an individual. Plus, these brokers will know which lenders offer the best rates to your circumstances.
A broker will also be able to negotiate on your behalf to get you the best possible terms.
Bridging loan mistakes to avoid
Don’t make the following errors that could end up costing you money:
Mistake #1: Not having a clear exit strategy in place before applying.
If you approach a lender without a clear idea of your repayment plan, they’ll view your situation as more risky and charge a higher rate.
Mistake #2: Opting for rolled-up interest when you can afford monthly payments.
The compounding effect of rolled-up interest starts to add up rapidly. If you can afford monthly repayments, opt for monthly instead.
Mistake #3: Comparing loans based only on monthly rates.
A slightly higher monthly rate with lower fees can end up working out cheaper in the long run.
Mistake #4: Missing additional fees hidden in the fine print.
Some lenders have sneaky additional charges. Always read the small print!
When do bridging loans make financial sense?
Despite higher interest rates, there are plenty of situations where a bridging loan makes financial sense:
- Buying in a chain – A bridging loan can help avoid costly chain breaks
- Auction purchases – The speed advantage can be worth the cost
- Property development – Quick funding can lead to earlier project completion
- Investment opportunities – Seizing an undervalued property can be worth the loan costs
The trick is ensuring your potential profits outweigh your financing costs.
Questions to ask before you get a bridging loan
Before you agree to any bridging loan, make sure you get answers to the following:
- What’s the exact monthly interest rate?
- Are there any early repayment charges?
- What are all the additional fees?
- How quickly can you complete it?
Bringing it all together
As you can see, bridging loan interest rates are not quite as straightforward as simply comparing percentages.
Understanding how the various repayment options work is just as important as knowing the current market rates. With the average at 0.72% per month and a record number of new borrowers, competition between lenders is driving some very good deals for borrowers.
Bridging loans can be great tools for speed and flexibility when used correctly. They can unlock profitable property deals and solve urgent financing problems.
The key is understanding how they work and having a solid exit strategy. With the right approach, bridging loans can be a powerful ally.