If you need money for a short amount of time, a bridging loan can be useful, especially if you need a loan to complete the purchase of a property while your existing property is on sale. You can also use bridging finance to renovate a property for sale or buy a property at auction. In the UK, the demand for bridging loans is increasing day by day, and there is great competition among high street lenders. When you think of getting a bridging loan, the first thing that comes to your mind is the cost of borrowing. The cost of bridging loans can be different depending on the lender you choose. This article will learn about the necessary information, including the cost of a bridging loan.
Eligibility Criteria For Bridging Loan
Bridging loans are different from other short term loans in terms of eligibility. It does not focus on your income or credit score. As these are secured against the property so the lenders are usually only concerned about the value of your property. The loan is secured against the property you will buy, hence your salary is not a crucial factor. The only criteria to get bridging finance is a high-value property and a good exit strategy. An exit strategy is a plan about how you will repay the loan amount.
Factors To Consider Before Getting A Bridging Loan
If you want to get a bridging loan, you should consider the following factors because they can affect your business in the long run.
Purpose To Borrow
If you are a business owner and need urgent financing, a bridging loan can help you fulfil your requirements. Many small and medium business owners use bridging finances while waiting for long term funds to become available. Usually, it is taken by property developers to buy a new property, but it can be used for other purposes such as refurbishment, business ventures, buy-to-let investment and paying a tax bill. The cost may vary with the purpose, so you should determine it prior to lending. Such loans become available in a short time when you provide the necessary documentation. But keep in mind that these loans have higher interest rates than conventional loans and require collateral.
Since it is a type of short term loan, you have to pay it within a short time as compared to traditional loans. Most bridging loan lenders offer loans for mixed terms, while some allow you to negotiate on loan terms. Ask your loan provider about early payment charges if you want to repay early and ask for the late fee when you fail to repay on time. You must know the effect of late payments on interest rates. The interest rate can be floating or fixed depending on your loan terms.
To estimate the cost of borrowing, check the total loan amount and the interest rate and consider if the cost is worth it. It is better to compare the interest rates offered by different providers so that you can choose the cheapest one. Prior to making a decision, consider the fees charged by lenders because they add up to your loan cost. Sometimes you only consider the interest rate, but when you compute it with other fees, you will end up paying more than what you thought.
The Cost Of Bridging Loan
Bridging loans are one of the most expensive ways of borrowing money. It is because the cost of bridging loans is calculated on a monthly basis instead of an annual basis. The interest rate can range from 0.4% to 2.0%. Bridging loans are different from mortgages and do not last for a long time. Usually, you can take a loan for weeks to a year, depending on your circumstances. As they are short-term debts, the interest rate is charged monthly rather than the annual percentage rate. It means that even a small change of interest rate can affect the overall cost of your loan.
However, there are different options offered by the lenders to pay the interest rate. These are as follows:
Monthly: You can pay a monthly interest rate, and it will not add to your bridging finance.
Rolled up or deferred: You also have an option to pay all the interest at the end of the loan term. In this case, there is no monthly interest payment.
Retained: You can borrow an interest for a predetermined time period and can pay it at the end of the bridging loan.
Some lenders allow you to combine these options. For example, you can choose a retained interest for the first three months and then pay monthly interest.
Bridge Loan Fees
The cost of bridging loan not only depends on the interest rate but also includes several types of fees that include:
Facility Fee: It is the fee you pay for setting up bridging loans, and it costs 1 to 2% of the loan amount.
Administration Fees: It is the amount you have to pay to complete the paperwork at the end of your bridging loan.
Valuation Fees: It is the fees of the surveyor who visits your property to check its value.
Legal Fees: The lender charges a legal fee, and it is usually charged at a fixed rate.
Exit Fees: It is the fee you have to pay when you want to repay early. It is usually around 1%, but not all lenders charge this fee.
Broker Fees: When you borrow through brokers, they charge a fee for finding the right bridging loan provider for you.
There may be some other fees, too, so keep in mind before deciding whether bridging finance is right for you.
How Can You Apply for a Bridging Loan?
There are many bridging loan providers in the UK, and it is easy to apply for a bridging loan. Here are some steps that can help you to find the best rates and making your application:
- First, decide why you need a bridging loan, how much do you want to borrow and for how long.
- Gather all the necessary information, such as your property value, equity in your home, and a mortgage. This information will help you to find a loan that meets all your requirements.
- Compare loan rates offered by different providers. Many websites provide comparisons of top lenders that can help you in selecting the best one.
- Decide whether you want to apply online or through a broker.
- Select the bridging loan you want to borrow and read all the fees and interest rates associated with it.
- After the application, wait for the lender to approve the loan. It can take up to 24 hours.
- Once your application is approved, the cash is transferred to your bank account within two weeks.
How To Get Best Bridging Loan Rates
The average cost of the loan varies with the lender and how risky a borrower is. The key to getting a loan at a cheaper rate is to have whole market access and meet the eligibility criteria of the lender. However, the lending criteria can vary from lender to lender, but all the lenders offer the most favourable terms and rates to the borrowers who have:
- A good credit score
- Experience in property
- A good security
- A viable exit strategy
The bridging loans can be regulated by the Financial Conduct Authority(FCA) or unregulated, but the cost of both are generally the same.
Pros And Cons Of Bridging Loans
As with other finance products, bridging loans also have some pros and cons.
The pros are that the process of application is simple, quick and convenient, the terms of borrowing are flexible, and you can borrow a large amount of money. Moreover, when your application is approved, you can get access to cash quickly as compared to traditional loans.
The cons of bridging loans include high-interest rate, high level of fees, and as the loan is secured against your property, there is a risk of losing property in case you fail to repay the loan.
It is crucial to look at the positive and negative sides of a loan before getting it. You can get advice from financial experts in order to make the best decision. An advisor can guide you from finding a provider and completing the application process to using and repaying the loan. Therefore, it is better to consult an expert and make an informed decision.
Although bridging loans have many benefits and provide funding when you need cash in an emergency till the long term finances become available. But it is not necessary that such loans meet the requirements of all individuals or businesses. You can look at the alternatives of bridging loans to get the funding in the best possible way. These alternatives include a second mortgage, personal loans, secured loans, remortgage and buy-to-let loans. All these loans help you to provide finances to purchase a property while your old one is on sale. You can complete the purchase process and repay the loan amount after the sale of your property.