After serval years in the industry, one common question we hear a lot is – what are the costs of a bridging loan?
Whilst this isn’t a ‘one-answer-fits-all’ question, we’ve provided a list of everything that you need to consider before arranging a bridging loan, including:
- What these elements are
- How they affect the cost of a bridge loan
- Additional fees you need to be aware of
- How to find the right finance for you
Core costs of a bridging loan
Overall, the cost of a bridging loan will be a combination of the amount that must be repaid, plus any additional fees incurred along the way. Below are the two most notable points that will determine the cost of your bridging loan:
1) Loan to Value (LTV)
When calculating the cost of a bridging loan, borrowers must have a clear idea of how much money they are borrowing when compared to the value of the property. This measurement is known as the Loan-To-Value (LTV) ratio. It is usually conveyed as a percentage.
Typically, the higher an LTV ratio, the bigger the risk is to the lender. As such, borrowers with low LTV ratios are more likely to be offered more favourable terms for their loan; such as lower monthly interest rates.
If a borrower is purchasing a property worth £500,000 and provides a deposit of £250,000 – their LTV would be 50%.
2) Monthly interest rates
There are many factors that can determine the monthly interest rate of a bridging loans:
- Loan-to-value required for the property
- The product that you choose
- Whether you need a first or second charge
Knowing how the much you’ll need to pay per month is very important. However, there are also several ways in which you can choose to pay your monthly interest rate.
At MFS, we offer a variety of options, including:
- Rollup: This means interest is not paid at the end of the month, for instance, but is added to the outstanding principal amount of the loan. This gives the borrower a little more freedom to determine the best time to repay the loan based around other financial commitments or earnings.
- Monthly/Serviced: You will pay the amount evenly at the end of every month
- Deferred/Combined: When you choose how many months you wish to delay payment for. These months will then be added onto the final redemption amount.
Additional fees you need to know:
Lenders may also have additional fees that you need to consider for the overall costs of a bridging loan:
Arrangement fees can be charged by lender but could also be levied by a broker, should you choose to use one. Typically, these one-off fees cost around 1-2% of the total borrowed amount.
As a standard part of the initial due diligence, a lender needs to establish the value of the property it is lending against. Some lenders might charge valuation fees to cover the cost of this process.
Early exit fees
Some lenders might charge an exit fee once the loan is repaid, which can increase the cost of a bridging loan overall. For most lenders, these fees are charged at around 1%.
Early redemption charge
Some lenders will also charge early repayment fees, should the borrower wish to repay the loan earlier than expected. This can also impact the total cost of a bridging loan. We do not have any early redemption charges (also known as ERC) here at MFS.
Does rate matter?
The market has seen a lot of movement in recent months. Rates have increased, there is no denying. But do rates matter? Here is a more optimistic view of the current situation. We explain when rates don’t matter and how you can use short-term finance to your advantage.
Finding the right finance
As with any financial decision, you should carefully consideration your options and find a lender that works around your needs. Above all, when it comes to working out the cost of a bridging loan, transparency is key. As the list above shows, there are many hidden fees that borrowers might be unaware of when first considering a bridging loan.
We pride ourselves on our ability to offer financial options in even the most complex cases.
Here at MFS, we underwrite our deals from the start. This means that by the time that we have come to an agreement with a client, all the rates and costs are clearly laid out in black and white. As such, our clients can feel comfortable that they will not encounter any surprise fees.
Tools to calculate the costs of a bridging loan
Similarly, you can find out what the cost of a bridging loan with MFS would be by consulting our products rates table.
With these on tools on hand, you can rest assured that we’ll deliver the best financial option for your needs. To find out more about out products, check out our full list here.