Fast bridging loans are becoming quite popular now and can be extremely useful for consumers, making buying a home or property investment much more accessible and forgoing the usual delays of traditional loan processing.
With that said, it is essential to know all of the fees and costs involved when obtaining a bridging loan before the loan application. Not knowing the full costs involved is what keeps many people from getting a bridge loan or from becoming approved. Just as in a business, it is vital for one to digest the fees in order to make sure it is a viable option.
To begin, you must know what precisely a bridge loan is. A bridging loan is a temporary, short-term loan usually secured by another asset (property) as collateral towards the loan. It bridges the gap between one loan and another when you do not have the capital immediately available for the purchase.
Bridging loans help consumers purchasing a new home without waiting to sell their current home or to purchase cheaper properties fast at auctions where time is of the essence.
It also helps businesses obtain financing needed for purchases, cash-flow, or renovations.
Speed of a Bridging Loan
There are several reasons why you might need to complete a property purchase as quickly as possible. One of the main reasons for utilizing a bridging loan is the quickness with which it gets completed. Fast bridging loans can close in a few days to a few weeks, making them a great option when you need to purchase a property fast and do not have the cash or traditional financing readily available.
Bridging loans do not typically have stringent qualification requirements, so credit reports and income qualification checks typically do not delay them. They are mainly contingent upon the exit plan in place, property value and collateral or security used towards the loan.
Fast bridging loans get arranged much quicker than a regular bank loan which can take a few weeks to a few months to process. Such time delays could cause you to lose out on bidding on your dream property.
Bridging Loan Finance Fees
When looking at obtaining a bridging finance, you’ll need to consider all of the costs involved. Getting a bridging loan is not the same as getting other types of traditional loans. While some bridging lenders require a high credit score, tax returns, and low debt-to-income ratios, majority of bridging lenders do not require this. The rates for a bridge loan vary depending on the lender, location, and risk involved with the loan. Generally, the bridging loan finance fees are more than that of a standard loan.
Fees required by the loan are title fees, administration fees, legal fees, and appraisal fees. There is also interest in the loan necessary as well. On top of that, there are additional fees if you cannot exit the bridging loan at the agreed-upon termination date.
One of the benefits of a bridge loan is that it allows you to purchase a home without restrictions and usually does not require monthly payments for the first few months. It gives the consumer time to sell the property purchased for a profit or any other properties if needed to exit the loan, or to secure long-term traditional funding to exit the loan. Please note that interest does accrue on the loan even if there are no monthly payments required.
Bridging loans can be quite costly and are more expensive than other types of traditional loans. It is due to the risk involved, the term length, and because of the high amount of bridging loan fees. Traditional loans can be cheaper, but they take much longer to obtain and have more stringent requirements for loan approval.
When taking on a bridging loan and using a secondary property that you are selling or if you plan to renovate and sell the property you are purchasing with the bridging loan, you need to ensure that you are able to take on two mortgages. If the property does not sell in time to exit the bridging loan, you could incur large bridging loan fees for extending the credit or possible repossession.
Bridging Loan Costs
Borrowers often pay a higher price for bridging loans due to the higher risk of the loan and shorter-term in comparison to a traditional long-term mortgage.
Bridging loan costs usually include arrangement fees of one percent of the sum advanced, plus interest of about one percent per month of the loan term. So, if for example, you took a bridging loan for £500,000 to purchase a house, you would owe £10,000 in fees and interest in just the first month of the loan. On top of that, there is sometimes an exit fee of one percent. If you took on a bridging loan for just two months, it could end up costing £20,000.
While using bridging finance at 1% per month might sound low for a rate, it translates to an annual percentage rate (APR) of 12% which is quite high in comparison to a traditional, long-term loan which usually has an annual percentage rate of around 3.75%-5% total.
It would be best if you always established how much the total overall bridging loan cost is with the additional costs of administration fees, arrangement charges, legal fees, valuation fees, and exit fees before completing any loan application.
Similar to a conventional mortgage, bridging loan rates can be fixed or variable. Variable rates can fluctuate so the amount you have to pay could go up or down.
There are many bridging loan calculators available online to determine the costs involved on your credit.
Bridging Loan Interest Rates
One advantage of a bridging loan is that you can roll up interest payments and fees and add them to a new mortgage. If you have another home you are selling to help you exit the bridging loan, lets say it is valued at £540,000 if you were able to sell it with a profit of £150,000 and roll in the £20,000 costs for the two months of the bridging loan, you would have a debt left of £370,000, which would be more reasonable to obtain a standard long-term loan for with more generous terms and rates.
Once you obtain the longer-term loan for the remaining £370,000, you would be able to exit the bridging loan and no longer owe fees on it.
The way the interest gets charged for bridging finance can also vary. It can be monthly, deferred (rolled up), or retained at a monthly rate, and the borrower settles the interest at the end of the term. At a deferred rate, all of the loan interest and total loan balance is due at the end of the term in a lump sum. Interest compounds during the loan term if deferred until the end of the term. Finally, at a retained rate, the interest is only borrowed for a specific period, and amount due calculated at the beginning based on the length of the term, and then payment gets settled at a later date.
Cheap Bridging Loans
While it is usually less expensive to take out a high loan-to-value mortgage rather than a bridging loan, often a bridging loan may be the only option available in the short term and for immediate property purchase. Cheap bridging loans are available. You need to research and shop lenders for reasonable and competitive fees on loan.
With bridging finance becoming more and more popular, bridging lenders have expanded their offerings. The bridging market is very competitive, and if you shop around, you could find lower interest rates and better offerings. Interest rates can sometimes be found for as little as 0.37% per month, making a bridging loan affordable. However, while rates are dropping, traditional long-term mortgages still offer the most economical option for most property transactions.
To find the best deal and a cheap bridging loan, it is recommended to go directly through a broker as opposed to applying directly through a company. Every deal is different and approved by the broker on a case-by-case basis for bridging finance, so ultimately your circumstances and collateral or security for the loan will be what determines your rates and bridging loan finance fees.
Total Cost of a Bridging Loan
While finding a cheap bridging loan is essential, you should always consider the total bridging loan cost, not just the interest rate alone. Most gravitate towards the lowest interest rate, but many lenders additionally charge large exit fees, fund management fees, and other hidden costs. The costs of different providers can be high. It is vital to get a breakdown of the total costs of the loan before proceeding so you can compare multiple lenders and expenses of the loan.
Do not forget always to ensure you can exit the loan on time without needing extensions at the end of the term and to consider how the loan will be repaid to know that the proposed exit plan is viable.