How Are Bridging Loans Calculated?

 

Different lenders will have their own ways of providing a bridging loan estimate or quote – some are much more detailed than others – but initially, they’ll want to know:

 

  • The amount you need
  • The deposit you have
  • The length of the term

 

Lenders will also use more advanced criteria to determine your eligibility, such as your exit strategy, credit rating and level of security, so it’s important to make sure you can provide this information when asked.

 

Understanding how and when you will be able to repay the bridging loan will help the lender to calculate the best possible quote for you.

 

How Much Do Bridging Loans Cost and How Much Can I Borrow?

 

As well as interest charges, lenders may also provide a more comprehensive breakdown of bridging finance costs, which will influence how much you can borrow for a bridging loan.

 

Typically, these extra costs are made up of:

 

  • Arrangement fees – bridging finance costs usually include arrangement fees that amount to a percentage of the loan (around 2% is standard).
  • Valuation fees – when setting up a bridging loan, a valuation on the property being used as security is carried out. This fee varies according to the location and value of the property.
  • Redemption fees – something else to consider when weighing up the cost of a bridging loan is a possible redemption fee. Lenders might charge one for removing their charge from a security property. The standard fee is usually around 1%.
  • Legal fees – as well as paying your own legal costs, the lender will ask you to foot the bill for a solicitor to complete legal due diligence on the property(ies).

 

What Are Bridging Loan Rates?

 

There are usually three interest repayment options lenders will consider when making their bridging loan rate calculations: monthly, rolled up, and retained.

 

The total amount you’ll pay will vary according to the ones available to you.

 

Monthly

Monthly interest on a bridging loan is calculated the same as for an interest-only mortgage. That means monthly charges, with the remainder payable in full at the end of the term.

 

Rolled up

Rolled up (or compound) interest is where accrued interest is added to the accumulated interest of previous periods and the combined total is paid off at the end of the loan term.

 

For example, with a £100,000 loan, let’s say £1,000 interest is added at the end of the first month, taking the total owed to £101,000. In the second month, £1,100 in interest is added, taking the total to £102,100, and so on until the end of the term, where it’s all paid off together.

 

Retained

With retained interest, the lenders work out the amount of interest due at the beginning of the term. Like the rolled up interest, the combined total is due at the end.

 

Lending £100,000 at 1% on a 12-month term would mean the amount payable at the end would be £112,000 (£100,000 principle + £12,000 interest). But if you paid it off after 6 months, you’d only pay £106,000.

 

Other Bridging Loan Costs/Fees

 

Lender’s assessment fee

Also referred to as a loan drawdown fee, this is a fee payable to the lender upon drawdown of the loan and is usually in the region of £295. This amount can vary according to the amount of properties involved.

 

Exit fee

Some lenders charge a fee when the loan is repaid which can be around 1.25%.

 

Telegraphic transfer fee

 This is the fee for transferring funds and is usually between £25 and £35.

 

Broker fee

If you’ve ever used a (good) broker to find you a deal on a standard mortgage, you’ll be aware of the amount of work they do. They find a deal, act as an intermediary, push through admin work and generally fight your corner, plus a lot more. This obviously comes at a cost.