This information should not be interpreted as financial, tax or legal advice. Mortgage and loan rates are subject to change.
Securing finance quickly, to secure a property in the competitive UK property market, can be challenging. Traditional finance methods, such as a mortgage, may not work when you need access to fast funds.
This is where a bridging loan comes in. These short-term loans offer a quicker financing solution for a property purchase than a mortgage.
While convenient, bridge loans come with a higher cost. The higher interest rates and fees can increase the total expenses of this loan.
In this article, we outline the costs and guide you on how to secure cheap bridging loans.
A bridging loan is a short-term loan designed to 'bridge' the gap when you need fast funds in a property transaction. These loans are available to a wide range of borrowers and have flexible repayment terms.
Bridging finance is a great solution in various situations, where quick access to funds is critical in a property transaction.
Here are a few situations where it is useful to apply for this loan:
- Auction purchases: Winning bidders at a property auction are usually required to complete the purchase within 28 days. A bridge loan is the best way to secure the necessary funds promptly.
- Property chain delays: If you are near completion of a renovation project, and a potential future project property comes up for sale, a bridge loan can help you finance the purchase before selling your existing property.
- Renovation and development projects: Bridging finance can provide the quick, short-term funds you need to get your renovation or development project off the ground.
- Uninhabitable properties: Uninhabitable properties are not eligible for a mortgage based on unliveable conditions. In this case, you can use a short-term bridging loan to purchase the property.
Here is the eligibility criteria to apply for a bridging loan:
You must be 18 years old or older to apply for a bridge loan in the UK. Businesses and individuals can use these loans to secure funding for a property purchase.
Lenders need a deposit of at least 25% of the property value. The exact amount will depend on the specific lender’s criteria.
Bridging finance needs property as security. This can be the property you are purchasing with the loan or a property you currently own.
Lenders need you to have an exit strategy, which is your plan on how you will repay the loan. Your exit strategy could be the sale of a property or refinancing the loan with a mortgage.
You may need to provide proof of income for your bridge loan approval. This can include property, pension, and employment income. You can get a short-term loan if you are self-employed, or retired, by proving your financial status.
Some lenders will work with applicants who have credit issues, where others do not. This means you can still get a bridging loan with bad credit.
Lenders will consider the type, condition, planned use, and location of the property you plan to buy. Certain lenders may have specific property criteria for their loans.
The interest rates and costs make a bridging loan more expensive than a mortgage, which is why they are intended to be used for specific purposes and only over a short period of time.
Here we explain the bridging loan costs:
Bridging loan interest rates are charged monthly, rather than annually as with a mortgage.
To determine the interest costs of a short-term loan, you can use a bridging loan calculator. Loan calculators use the current interest rates to provide an estimated monthly payment. The actual rate you can achieve will depend on the nature of your case and which lender’s criteria it fits with.
The following factors influence bridging loan interest costs:
Bridge loans are short-term solutions, usually lasting from 3 months to 18 months. The lender has a shorter amount of time to make a return on their investment than a mortgage.
These loans can carry a higher level of risk for the lender. This is because they are often used for property purchases that a traditional mortgage lender might consider too risky, such as uninhabitable properties or properties that need work. The interest charged helps to offset this risk.
Short term loans can be arranged faster than traditional mortgages, often within a few days. This speed and convenience can contribute to the interest rate.
You can choose between a regulated and an unregulated bridging loan. The key difference is that the Financial Conduct Authority (FCA) in the UK controls regulated loans.
Unregulated loans are not controlled by the FCA. This allows for increased flexibility in the lending criteria. This flexibility can lead to higher interest rates to reduce the increase in risk for lenders.
You will need to provide at least 25% of the value of the property as a deposit, as security against the loan. The deposit you put down will impact the loan-to-value (LTV) ratio, which will impact the deals you can access. Generally speaking, the more you put down as a deposit, the lower the interest rates that are available to you.
Lenders will charge a product fee, also called an arrangement fee, to set up the loan. Product fees usually range from 1-2% of the total loan amount, but this will depend on the specific lender. The product fee is either added to the loan amount, or charged upfront.
Lenders use a property valuation to determine the current market value of the property. You will have to pay for the costs of the valuation.
The cost of the valuation will depend on the value of the property. In certain cases, lenders will accept a desktop valuation which can reduce the valuation cost.
Solicitors complete the legal work for the transfer of the funds and ownership of the property. The solicitor fee will depend on the complexity of the transaction, and the value of the loan.
If you use a broker, they may charge a fee for their services. The rates and terms of the broker fee will depend on the broker you are working with.
The value of a broker is that they can take enormous amounts of work away from you, and they have expertise that can make a huge difference in finding an appropriate deal for you. Ultimately, a broker could save you money as well as time.
Administrative charge on repayment
Some lenders charge a nominal administrative charge when you repay your loan.
You can find cheap bridging loans to make this type of loan an affordable financing solution.
Here are the steps to get cheap bridging loans UK:
The most effective way to secure a ‘cheap’ loan is to compare different loan offers. You will need to consider the interest rate that various lenders offer. You should also compare the fees, to have a clear idea of the total cost of the loan.
A broker can help you do this. You could speak direct to lenders, however, each lender can only discuss the products they offer, so you may not come across the deal that offers you the cheapest bridging loan you could get.
Here are extra factors to consider when comparing loans:
Understanding the lender repayment options can help you select the most cost-effective loan for your situation.
You usually have these three flexible repayment options:
- Monthly interest: With this option, you make repayments towards the interest each month. This can help manage the cost as it prevents the interest from compounding over the loan term.
- Retained interest: With retained interest, lenders calculate the interest for the entire loan term upfront and then add it to the total loan amount. This means you don't have to make monthly payments, but it does increase the total amount you owe. This can be helpful if you don’t have regular income during the loan term.
- Rolled interest: In this scenario, interest is charged to the loan each month and paid at the end of the loan term.
Consider the reputation of the lenders when choosing a bridging loan. This can be difficult as a consumer as you may not be familiar with the industry. Assessing lender reputation can also be difficult given this type of lending is not regulated by the FCA.
This is where a broker can help. A broker will have relationships with a range of lenders, based on working with them on a daily basis. They will know what their turnaround times and service standards are like as well as being aware if a lender is a trusted operator in the market.
Work with bridging loan brokers
It can be difficult to compare loans and negotiate with lenders. Working with a bridging loan broker can make the process easier and help you secure a cheaper loan suited to your needs.
Here is how working with a broker can be beneficial:
- Market knowledge: Brokers understand the current trends, interest rates, and lending criteria of a wide range of lenders. This knowledge allows them to guide you towards the most cost-effective loan options.
- Access to a wide range of lenders: Brokers have access to a network of lenders, including those that don't deal directly with the public. This can broaden the cheap loans available to you.
- Bespoke service: A broker will take the time to understand your unique situation and needs. They can then recommend the most suitable loans and negotiate on your behalf to secure favourable terms.
- Time and effort: Researching, comparing, and applying for loans can be time-consuming. A broker can manage this process for you, freeing up your time and reducing the stress associated with securing a loan.
Working with a broker can include a broker fee. While this is an extra cost, you will have easier access to cheap loans. A broker can also provide valuable support throughout the loan process to ensure it is fast and suited to your needs.
Commercial Trust is a specialist broker that can help you secure cheap bridging loans.
We work with a range of lenders to provide you with an affordable deal. We will also negotiate with lenders on your behalf to secure favourable terms and low-interest rates. Our expert advisors will provide advice to help you make the best decision based on your needs.
Get in touch to discuss how we can secure you a cheap short-term loan.
Bridging loan rates change all the time, the best way to check available deals is to use a bridging loan calculator.
Bridge loans have higher interest rates compared to mortgages. This is because of their short-term nature and the increased risk to lenders.
The cost of a bridging loan depends on various factors, including the interest rate, the loan term, and any fees charged by the lender. While the interest rates are usually higher than mortgages, a bridging loan can still be cost-effective, if you need quick access to funds or are investing in a property in need of renovation.
You only have the option of repaying bridging finance on an interest only basis throughout its term – this means you will not be paying back any of the capital (the lump sum you borrowed) during the term.
The interest only payments on bridging finance can be set up in three ways:
On a serviced basis - where you make monthly payments of the interest, via direct debit, as you would on a standard interest only mortgage.
On a retained basis – where the interest that is due on the bridging loan is deducted at the beginning of the loan term, then repaid along with the cash lump sum at the end of the term.
On a rolled-up basis – where the monthly interest payments are added to the loan and are paid at the end of the term. There can be restrictions to the LTV and/or loan amount on this basis.