Need to purchase a new property before selling your old one?
Bridging loans can be an ideal solution for real estate investors and homeowners. However…
The costs of bridging loans can spiral quickly.
If not managed properly, you could pay thousands in fees and interest. The good news? With the right strategies in place, you can keep bridging loan costs as low as possible.
Contents
Your Quick Guide To:
- Understanding Bridging Loan Costs
- Smart Ways To Reduce Your Costs
- Exit Strategies That Save You Money
Understanding Bridging Loan Costs
Bridging loans are a type of short-term financing used by real estate investors and homeowners when they need quick access to capital. These loans help bridge the gap between buying a new property and selling an existing one.
These loans typically have a term of 3-12 months. Bridging loans come with several costs.
The biggest cost is interest. Interest rates for bridging loans are higher than traditional mortgages and are usually calculated on a monthly basis.
In the UK, most bridging loan interest rates are in the region of 0.52% to 2% per month depending on your situation.
Monthly rates might not sound too bad…
However, annual percentage rates (APR) can range from 6% to 24%. So, you need to find out how much a bridging loan costs at https://bridgeloandirect.co.uk/how-much-does-a-bridging-loan-cost/ before signing up to any deal.
In addition to interest rates, bridging loans also typically have arrangement fees that cost 1-2% of the loan amount.
There are also valuation fees, legal costs, and potential exit fees to consider.
How to Compare Bridging Loan Rates
Are you looking for the best bridging loan rates?
Shopping around is important as rates can vary widely from one lender to another. Some lenders advertise rates as low as 0.4% per month. Others charge more than 2% per month.
The trick to comparing bridging loan rates is to look beyond the headline interest rate.
A lender may offer a low monthly rate but have higher arrangement fees that make the overall cost more expensive.
Be sure to calculate the total cost of borrowing, taking all fees and interest into account.
You should also consider the structure of the loan.
Some lenders offer retained interest (borrowing the interest up front) while others offer rolled-up interest (paying everything back at the end). Both impact your cash flow differently.
Smart Ways to Reduce Your Costs
You can keep bridging loan costs as low as possible by following some simple strategies.
Start by working to lower your loan-to-value (LTV) ratio.
The lower your LTV the better rate you can get. Try to make a larger deposit or use additional security to lower your LTV. Lenders view you as lower risk if you have more equity. You can also use multiple properties as security to improve rates.
Negotiate all of your fees.
Did you know bridging loan rates and fees are not set in stone? In fact, unlike a standard mortgage, there is often room for negotiation – particularly with arrangement fees and broker commissions.
Use a specialist broker who can negotiate on your behalf to secure you the lowest fees.
Time your loan properly.
As interest is calculated on a monthly basis, even a few weeks can make a big difference to your overall costs.
Have a solid, realistic exit strategy in place to avoid having to extend the loan.
Bridging loans in the UK are on the rise and the sector is performing strongly.
The loan book reached £9 billion in Q1 2024, so it’s crucial to be strategic about how you source and repay to save money.
Exit Strategies That Save Money
Choosing the right exit strategy can significantly impact your bridging loan costs.
Remember, bridging loans are designed as short-term finance. The longer you have the loan, the more interest you’ll pay.
Exit strategy is all about getting the loan repaid as quickly as possible.
Common strategies include selling your existing property, refinancing with a traditional mortgage, or using the funds from another source to repay.
Plan to get your property sale ready before completing the bridging loan.
If you plan to sell your existing property to repay the loan, make sure it is in a good state to sell and ready for marketing before completion.
Get it valued, make repairs, declutter and consider marketing before completion to help it sell faster.
Refinancing exits require planning. Get the mortgage application process started early and line up agreements in principle from mortgage brokers.
This way you can quickly switch from bridging to standard mortgage when the time is right.
Seasonality is a factor in the property market. Selling during peak periods can help you move faster.
Working with Bridging Loan Brokers
Should you use a broker or go direct to lenders?
Brokers can help you save money despite their fees.
The best brokers have access to better deals than you can find on your own and can negotiate on your behalf to secure the lowest rates and fees.
Broker fees can vary, so always ask upfront and compare the total cost of going through a broker against going direct.
The best brokers are transparent about their pricing.
Understanding Hidden Costs
Be aware of hidden costs that can increase the total cost of your bridging loan.
Valuation fees are one area where costs can creep up, particularly with non-standard properties or those requiring development work.
Legal fees can also mount up.
Exit fees are another hidden cost many borrowers are unaware of.
Many lenders charge redemption administration fees when you pay off the loan. These can be several hundred pounds and are not always disclosed upfront. Exit fees are more common with bridging loans than you might expect.
Early repayment charges are not usually an issue with bridging loans as with mortgages but double-check.
Always ask for a full breakdown of all fees before signing any paperwork. Reputable lenders and brokers will be transparent about all costs.
Making the Most of Your Bridging Loan
Bridging loans are a powerful real estate financing tool when used correctly.
Borrow only what you need.
The temptation is to borrow a bit extra to cover renovation costs or contingencies. But remember, every pound borrowed will cost you interest.
Good communication with your lender is essential.
Maintain good communication with your lender throughout the loan period. If your circumstances change and you need an extension, it’s better to ask early than to run into problems later. Keep your exit strategy documented.
Lenders want to know you have a clear plan to repay.
Plan for contingencies.
Property sales can fall through, and exit plans can change. Have contingency plans in place just in case.
Wrapping Things Up
Managing bridging loan costs effectively comes down to preparation, comparison, and timing.
Comparing all the different costs, including interest rates, arrangement fees, valuation and legal fees and negotiating where possible.
Planning your exit strategy to minimise the loan term will help you control bridging loan costs and make the most of this flexible financing option.
After all, bridging loans are short-term solutions designed to help you move quickly in competitive markets.
The key takeaway? Do your homework, compare all costs, negotiate where possible and plan a rock-solid exit strategy.
