What a Bridging Loan Actually Costs

When comparing bridging finance, it is natural to start with the interest rate, that’s understandable; borrowers and brokers will often put several quotes next to each other, look at the monthly rate and assume that the lowest figure represents the cheapest facility. 

So while the interest rate is clearly an important part of the calculation, it is only one element of what a bridging loan actually costs, find out here the ins and outs of what a bridging loan can actually cost you.

The five numbers that decide what you pay

There are five factors in a bridging loan application that determines the real cost of a bridging loan, these are:

• The monthly interest rate
• The arrangement fee
• The exit fee
• The term of the facility
• The third-party costs 

Looking at these in isolation gives you a much more accurate picture than comparing interest rates alone.

what to consider…

Interest

The monthly interest rate that you find on a loan determines how much interest accrues on the outstanding balance, but the way that interest is structured also matters.

Depending on the facility, interest may be retained, rolled up or serviced monthly, and each structure affects the amount you need to borrow and the amount ultimately required to redeem the loan.

Arrangement fees

Arrangement fees are another consideration as these are generally charged for setting up the facility and may either be paid separately or added to the loan. If a fee is rolled into the facility, it becomes part of the balance on which interest may be calculated, meaning the headline fee does not necessarily represent the cost in its entirety.

Exit fees

An exit fee can increase the total amount you repay, while a minimum term means you may have to pay interest for a set period, even if you repay the loan sooner.

Third party costs

Finally, there are third-party costs such as valuation and legal fees, which can vary rather considerably depending on the property and the structure of the transaction.

This is essentially why two lenders seemingly offering the same bridging loan interest rate can produce two very different total costs. 

The rate is only one variable within the overall structure, and borrowers should be comparing the amount they will actually have to repay rather than simply choosing the lowest percentage.

Retained, rolled or serviced: why it changes your net advance

This can become somewhat hard to understand, but what you need to know is simply put, the amount a lender agrees to lend is not always the same as the amount you will actually receive, because fees and retained interest may be taken from the loan before the funds are released.

This becomes particularly important when interest is retained or rolled up as part of the facility.

With retained interest, the lender calculates the interest you are expected to pay over the agreed loan period and includes it in the loan from the beginning. This means you do not make separate monthly interest payments, as the interest is accounted for upfront.

Rolled-up interest works differently in that the interest is added to the outstanding balance over the life of the loan; on the other hand, serviced interest involves the borrower making interest payments as they accrue.

There isn’t a right way of doing it, the most suitable route depends on the transaction, the borrower’s circumstances and the intended exit strategy, but the distinction is important when calculating how much funding is actually available.

The minimum term: What is it?

Minimum terms can be one of the more overlooked factors when comparing bridging loan costs, particularly when the borrower expects to repay the facility quickly. 

This can be somewhat complicated to understand, but in reality it is straightforward. Let’s take an example: purchasers may use bridging finance to complete a transaction while waiting for another property to sell or a longer-term mortgage to become available.

Now, if that exit happens sooner than expected, the borrower may still be subject to the lender’s minimum term. 

Much of the time, the minimum term suits some borrowers perfectly, but if you’re unsure whether it could be sooner than the lender’s minimum term, you can instead choose a day rate bridging loan which is much more suited to this scenario.

By using a day rate bridging loan, interest is charged based on the actual number of days the facility is held, rather than requiring you to pay for a longer minimum period than what you really need.

This is precisely why the nuances of the loan can make a much bigger difference than simply considering the headline interest rate. 

Think about if you only need finance for a few weeks, a bridging loan that is designed around the actual period of use may produce a better outcome in the finalisation of the loan than a product with a slightly lower monthly rate but a minimum term that extends beyond your exit date.

Bridging loan costs (outside of interest rates)

By now, we’re sure that you understand that interest is only part of the cost of arranging bridging finance, something else to consider is the type of professional work required.

Valuation

A valuation is a good example, considering that depending on the property, loan and lender’s requirements, a full physical valuation may be required. Do note however in some circumstances an automated valuation model or desktop valuation may be appropriate too.

In these instances, wherein an AVM or desktop valuation can be used, it may reduce the cost of the valuation and remove the need to wait for a physical inspection and report.

The most appropriate valuation method always depends on the individual transaction, but it is worth establishing what the lender needs from you from the getgo rather than discovering it after the application has started.

Bridging loan legal costs

Legal costs should also form part of the comparison, as depending on the circumstances, there may be an opportunity for the same legal firm to act for both the borrower and lender, subject to the relevant professional requirements. 

Where dual representation is possible, it can reduce duplication compared with completely separate legal representation, although the exact structure and costs will depend on the transaction.

A failed exit plan

Borrowers should also understand what happens if the original exit does not happen within the expected timeframe, this can happen and there are rescue remedies in place for this. 

Typically, an extension may result in additional interest and potentially an extension fee, while a facility that moves beyond its agreed terms can result in default charges. 

These costs are not necessarily a problem with bridging finance itself; they are a reminder that the exit strategy needs to be realistic when the facility is structured.

How to compare two bridging quotes the right way

The best way to compare two bridging loan quotes is to avoid over-analysing the monthly rates and instead look into the total cost of redemption over the period you realistically expect to hold the loan. 

This provides a much more meaningful comparison because it brings interest, fees and everything we have discussed here, together.

A lender should be able to explain the additional interest, any extension costs and the implications of moving beyond the agreed term. 

Remember, the objective is to compare the total cost of each facility against the same realistic scenario. Once you do that, the difference between two bridging quotes can look very different from the difference between their headline rates.

When the more expensive bridge is the cheaper decision

What may surprise you is that there are circumstances where choosing the facility with the lowest headline cost can actually be the more expensive decision. 

This can happen when the structure of the finance simply doesn’t match the requirements of the transaction and the borrower loses time as a result.

From the lender side, we see the consequences of when borrowers spend too long trying to make an unsuitable funding structure work. 

If the lender’s criteria do not properly fit the transaction and the borrower then has to move to another lender, the additional weeks can create costs and, in the worst cases, put the underlying purchase at risk.

This does not mean borrowers should simply accept a more expensive bridging loan rate because it promises greater certainty. The right approach is to assess the whole transaction and understand what each lender is offering in return for the cost. 

What people are asking…

How much does a bridging loan cost in total?

The total cost of a bridging loan depends on the loan amount, interest structure, term, lender fees, exit arrangements, valuation and legal costs. The most accurate way to find out is to speak to a lender as every case is tailored to the borrower.

Do all bridging loans have arrangement and exit fees?

No. Bridging loan fees vary between lenders and individual products. Some bridging loan lenders might include an arrangement fee, an exit fee, both or neither, which is why these charges should always be considered alongside the interest rate when comparing the overall cost.

What does retained interest mean for the amount I actually receive?

Retained interest is accounted for within the facility at the outset, which means the gross loan amount can be higher than the amount actually available to the borrower at completion. If you are using the bridge to fund a purchase or refurbishment, it is important to find out the net advance after retained interest and any applicable fees.

Can I repay a bridging loan early without a penalty?

Some bridging products are structured to allow early redemption without a minimum term, while others may require a minimum period of interest or include other charges. Always find out from the start the early redemption terms before choosing a lender, particularly if you expect to exit the bridge quickly.

Before you go….

At MS Lending Group, we structure bridging finance around the transaction rather than treating the interest rate as the only consideration. For borrowers who need finance for a short period, our day rate short term bridging finance can provide a structure based on the actual number of days the facility is used. 

We also provide residential bridging loans and refinance bridging loans for a range of property funding requirements, with the exit strategy considered as part of the initial lending decision.

Before proceeding, it is also worth understanding what happens if your bridging loan exit fails, particularly where your exit depends on a sale or refinance completing within a specific timeframe.

The bottom line is, the cheapest bridge is not necessarily the one with the lowest rate; if you need more information on the best route for you, get in touch today with our team of lenders here at MS Lending Group.