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Is Bridging Finance Expensive? A Detailed Look at the Costs

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Market Financial Solutions are a bridging loan and buy-to-let mortgage provider and are not legal, financial, investment or tax advisers. This document is for informational purposes only and does not, and should not be considered, to constitute legal, financial, investment or tax advice or be relied upon by any person to make a legal, financial, investment or tax decision. Therefore, Investors are encouraged to seek appropriate professional advice. The information in this content is correct at time of writing.

When it comes to expense, it’s all relative. Bridging loans, alternative forms of flexible finance to those found on the high street, can be costlier than their mainstream counterparts. But this expense is short-term in nature. Those asking the question why are bridging loans so expensive may want to take a step back and take a more long-term view. In truth, the question of ‘are bridging loans expensive’ may be a bit simplistic, all things considered. Bridging loan terms typically last mere months and are designed to be exited quickly onto traditional finance or by other means, such as selling an asset.

Investors need to remember that while there may be cheaper deals on the high street, there may not be a traditional mortgage or long-term solution suitable for their individual circumstances – especially if they are complex. Mainstream lenders pulled deals and tightened their criteria as the economic climate shifted, and this left some borrowers without the finance they needed to continue with their plans.

Specialist lenders were there to fill the void. Bridging loans can provide investors with fast and flexible finance for their residential and commercial investments.

Most of the time, borrowers use some form of collateral as security, such as real estate or stock inventory. The lengths can vary depending on the bridging lender involved. At Market Financial Solutions, for example, our loan products are available from 3 to 24 months and are secured on property only.

Bridging loans can be difficult to understand, and many of our clients often ask, ‘why are bridging loans so expensive?’. As such, this blog will investigate their various fees that can incur. We’ll examine how expensive bridging loans are, and how investors can assess the expenses involved.

Bridging finance has become an increasingly popular option for property investors and developers in recent years. As a short-term financing solution, bridging loans allow borrowers to access funds quickly to purchase or renovate a property before securing permanent financing or selling the asset.

However bridging loans are often perceived as an expensive form of finance. This article will take an in-depth look at the typical costs associated with bridging finance to help you determine if it’s the right funding solution for your next property project.

What is Bridging Finance?

Before diving into the costs, let’s first define what bridging finance is.

Bridging loans are a type of short-term financing that provides funds to bridge a temporary cash shortfall between buying and selling an asset. The loans are usually secured against the property being purchased or renovated.

Typical uses of bridging finance include

  • Purchasing property at auction
  • Funding renovations or refurbishments
  • Buying land or commercial property
  • Releasing capital from an existing property

Bridging loans can be arranged quickly, often within 1-4 weeks, and have terms ranging from 1 to 24 months. This speed and flexibility is the main appeal of bridging finance.

The loan must be repaid once permanent financing or the sale of the asset is secured. Popular exit strategies include refinancing with a buy-to-let or commercial mortgage, selling the property, or re-bridging onto a new loan.

Costs Associated With Bridging Finance

Now let’s take a look at the typical costs borrowers can expect with a bridging loan:

Interest Rates

  • The single biggest cost is interest, charged at a higher rate than traditional mortgages
  • Rates are based on the perceived risk of the loan and asset
  • Average rates range from 0.75% to 1.5% per month
  • Interest can be rolled up to the end of the term or serviced monthly

Arrangement Fees

  • An upfront fee charged by the lender to arrange the loan, usually 1-2% of the loan amount
  • Covers the lender’s administrative costs for underwriting and setting up the loan

Exit Fees

  • Some lenders charge a fee for redeeming the loan at the end of the term, but this is uncommon
  • More often there is a minimum term requirement, such as 6 months

Valuation Fees

  • Lenders require a property valuation report before approving the loan
  • Costs depend on property value but expect 0.1-0.3% of the amount borrowed

Legal Fees

  • Both lender’s and borrower’s lawyers need to be paid to process the property title transfer
  • Expect to pay £2,500 – £5,000+ for the lender’s lawyer

Broker Fees

  • Specialist brokers can secure bridging loans on your behalf, usually paid by the lender
  • Some brokers charge an additional fee but this can provide access to better loan terms

What Influences Bridging Loan Costs?

The specific costs for a bridging loan vary between lenders and depend on multiple factors:

  • Loan purpose – A lower risk loan, like purchasing property, may have lower rates than funding renovations

  • Loan-to-value (LTV) – Lower LTVs around 50% tend to have cheaper interest rates

  • Property value – Loans below £100k or above £10m may have higher fees

  • Term length – Longer terms of 18-24 months spread costs over more time

  • Credit profile – Borrowers with strong credit may qualify for better loan terms

  • Exit strategy – A clear, feasible exit plan can result in lower interest rates

  • Experience – Borrowers with proven experience may get offered cheaper deals

Strategies to Reduce Bridging Loan Costs

If bridging finance seems expensive, here are some tips to reduce the costs:

  • Shop around for lenders and compare interest rates
  • Opt for a lower LTV if you can afford a larger deposit
  • Choose a longer term to spread costs over time
  • Use an experienced broker to access better deals
  • Purchase property below market value to reduce risk
  • Have a solid exit strategy in place before applying

While bridging loans carry higher costs than traditional mortgages, the flexibility and speed can open up profitable opportunities that justify the extra expense for many property investors.

Bridging Loan Cost Examples

To illustrate the typical costs, here are two examples of potential bridging finance scenarios:

Scenario 1

  • £500,000 loan
  • 65% LTV
  • 12 month term
  • Property purchase & minor renovation

Estimated Costs

  • Interest – £45,000 (1% per month)
  • Arrangement Fee – £10,000 (2%)
  • Valuation – £500
  • Legal Fees – £3,500
  • Total: £59,000

Scenario 2

  • £150,000 loan
  • 70% LTV
  • 6 month term
  • Heavy refurbishment

Estimated Costs

  • Interest – £12,375 (1.25% per month)
  • Arrangement Fee – £3,000
  • Valuation – £250
  • Legal Fees – £2,500
  • Total: £18,125

These examples illustrate how the costs can add up. But taken as a percentage of the loan amount, bridging finance may be less expensive than perceived depending on the project.

Is Bridging Finance Worth the Costs?

While bridging loans are certainly more expensive compared to conventional mortgages, the costs may be justified depending on your investment strategy and goals.

Here are some instances where bridging finance could be worth the extra expense:

  • Purchasing property at auction or below market value
  • Securing a great deal that requires swift action
  • Accessing funds faster than traditional lenders allow
  • Funding renovations to add value to a property
  • Releasing capital to take advantage of other opportunities

The high speed and flexibility of bridging loans enable certain profitable strategies that may not be possible with other financing options.

However, bridging finance is certainly not the cheapest form of property finance. Consider all your options carefully and run the numbers before deciding if a bridging loan is right for your next project.

Bridging finance can be an expensive form of property funding, with higher interest rates and fees compared to traditional mortgages. However, it enables agility and access to funds much faster than mainstream lending.

For investors pursuing certain strategies like renovations or purchasing below-market value, bridging loans can be an extremely useful tool despite the costs.

When determining if bridging finance is the right solution for your next property project, carefully assess the likely costs and weigh them against the potential profitability unlocked by bridging loans. With the right opportunity, the flexibility bridging provides can justify the expense.

is bridging finance expensive

Are bridging loans expensive?

Like any loan, the interest rate and the duration of the loan will have the biggest impact on how expensive a bridging loan is.

These charges will change depending on what a loan is used for. The answer to the question of ‘is bridging finance expensive’ will be affected by whether the funding will be used to renovate a property, buy a house, or invest in commercial property. What’s more, the charges involved will vary between lenders.

Moreover, the longer a loan term is, the more a borrower will be expected to pay. Ultimately, to answer the question, ‘are bridging loans expensive?’ one must consider the circumstances of each individual case.

is bridging finance expensive

How to get an in-expensive bridging loan

The obvious next question after ‘are bridging loans expensive?’, is how to get the best and cheapest bridging loan possible for one’s needs.

As such, it’s important that investors assess their options and fully comprehend the product that they’re applying for. This is especially important for bridge loans, which can offer very niche solutions.

By employing a broker, investors can go some way in finding a bridging loan that will match their unique financial needs – whether it ends up being ‘cheap’ or otherwise. However, it’s also vital that investors select the right lender, as they can make all the difference in how expensive a bridging loan is.

Brokers regularly bring their clients back to us understanding this. They know our flexibility and speed can provide the best outcomes for their borrowers. We provide a bespoke service, where all our products can be tailored to fit a borrower’s circumstances.

How Expensive is Bridging Finance? You Won’t Believe the Answer!

FAQ

How much are bridging fees?

Bridging loans typically cost 1-2% of your loan size, charged as an arrangement fee by your lender.

What are the disadvantages of a bridge loan?

Cons of bridge loans

Higher rates: Bridge loans usually have higher interest rates and APRs compared to traditional mortgages. Limited borrower protections: Bridge loans rarely come with protections for the loan holder if the sale of the old home falls through.

What are the downsides of a bridging loan?

The most notable bridging loan cons are: Higher borrowing costs: Bridging loans are quick and convenient finance arrangements, so lenders charge accordingly. Interest rates tend to be high in comparison to other funding options.

Is a bridge loan expensive?

Bridge loan interest rates typically range between 6% to 10%. Meanwhile, traditional commercial loan rates range from 1.176% to 12%.

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