Buy Your Dream Home Before Selling The Old One?
Who doesn’t want to buy their dream home without the need to stress over timing or chains collapsing? Property rarely waits for you to get ready.
But there’s a snag:
Bridging loan costs can be an absolute mystery to the uninitiated. To play the property market to your advantage and make smart financial choices you need to know what you’re dealing with.
Hang on there- you could be throwing money out of the window.
I’m going to simplify everything you need to know about bridging loan costs so you can make a confident decision and potentially save yourself thousands.
Let’s get into it!
What you’ll discover:
- What Are Bridging Loan Costs Really?
- The Hidden Expenses Most People Miss
- How Interest Rates Actually Work
- Smart Ways To Minimize Your Total Costs
What Are Bridging Loan Costs Really?
Bridging loan costs are everything you will pay for short-term property finance.
If you’ve been looking at how much are bridging loans in the UK you’re already aware they work differently to standard mortgages. Pricing structure-wise, they’re no different.
Here’s the catch:
Bridging loan costs are usually split into several main areas. Monthly, not annual interest. Arrangement fees. All manner of additional charges that can mount up. The devil is in the detail…
Don’t let that put you off though…
The bridging loan market is huge in the UK and has been growing consistently over the last decade. Industry analysts expect £10.9 billion by end of 2024. Growth like that brings more competition and the opportunity to secure better deals for well informed borrowers.
The Monthly Interest Reality
Something most people don’t know is:
Bridging loan interest rates are quoted monthly (hence the LTV split I mentioned earlier). NOT annually, like with normal mortgages. Compare apples to apples before you decide the loan at a glance.
Interest rates for bridging loans can vary depending on the market, your creditworthiness, and lender. But you will generally see rates in the range of 0.55% to 1.4% per month. It’s a palatable number until you realise…
0.8% per month is just over 10% per year. But hold on, we’re not borrowing for a year. Most bridging loans are 6-12 months max. That means you only pay for the interest on the term you use the funds.
The good news?
You only pay what you use. If you manage to exit your loan after six months then you’ve only paid six months worth of interest, even if you took out a 12-month loan.
See how that works?
Don’t get caught out and overpay!
Arrangement Fees: The Big Upfront Cost
This is where it gets a little more fun…
Arrangement fees can typically cost 1-2% of your total loan amount. For a bridging loan of £200,000 this would equate to £2,000 – £4,000 to arrange the loan.
Most bridging lenders let you roll this cost into the loan amount which means you don’t have to pay anything upfront. But either way, it’s another cost to you.
Bear in mind some lenders will waive arrangement fees for larger loans or loyal borrowers. It’s worth shopping around and asking to see if they’ll play ball on that front.
The Hidden Costs That Catch People Out
Care to know what most first time bridging loan customers have coming out of their ears?
Additional fees they didn’t factor in:
- Valuation fees: £300-£1,500 (depending on the value and complexity of your property)
- Legal fees: £1,500-£3,000 (for solicitor work and searches)
- Broker fees: Often 1% of loan amount (there are many that don’t charge)
- Exit fees: Rare these days but some lenders still charge them
The brutal truth is:
These “little” extra costs can easily push £5,000+ onto your bill. Never commit to a lender until you have a full breakdown of everything they charge.
How Processing Speed Affects Costs
Speed is one of the key advantages of bridging loans. Average completion time improved to 46 days in Q3 2024 (fastest since 2019).
But that speed costs:
Fast processing is a premium. All that extra speed will cost you via:
- Higher interest rate (marginally)
- Premium arrangement fee
- Express valuation charge
- Rush legal work costs
If you’re not in a mad rush don’t pay for it. Standard processing is the way to go.
Regulated vs Unregulated: What’s The Difference?
Something most people don’t know is:
Regulated bridging loans (secured on your main property) come with extra protections but take longer and cost more to arrange. Unregulated loans (buy-to-lets or commercial) are usually faster and cheaper.
Depends on your situation and the security property in question.
Smart Ways To Cut Your Bridging Loan Costs
So you want to keep costs down?
Here are some tried and tested ways to trim the costs of bridging finance.
- Improve your loan to value ratio. The bigger deposit you can put down, the better rates you will get. Aim for 60% LTV or under if you can.
- Shop around properly. Don’t make the mistake of going to a lender and assuming that’s the best you can get. Different lenders price risk differently.
- Use a good broker. Yes, they cost money, but an experienced broker can get you better deals than you would go direct.
- Have a solid exit strategy. If you can present a clear plan to the lender as to how you’ll repay the loan, they’ll give you better terms.
- Time it right. If you don’t have your heart set on something in a desperate hurry, try to avoid peak buying times like January and June when lenders can be a bit choosier with rates.
Calculate The True Cost
Want to know exactly how much a bridging loan will cost you?
For a £200,000 bridging loan over 8 months at 0.8% per month:
- Interest: £12,800
- Arrangement fee (1.5%): £3,000
- Legal/valuation: £2,500
- Total cost: £18,300
Holy moly, that sounds expensive! But it might just pay off in helping you secure that dream home (or avoid a chain collapse), especially when you spread it out over a year.
When Bridging Loans Make Financial Sense
Ok, the bottom line is:
Bridging loans are expensive and nobody expects them to be anything else. They are short-term tools to help you overcome specific problems or make specific opportunities happen.
They make sense when:
- Buying before selling to avoid chain breaks
- Buying fast at auctions
- Property renovating and need quick funds
- The cost of losing out on your dream home is greater than the loan costs
Maximising Your Success
The best secret to successful bridging finance? Preparation.
Know your costs from the get go. Have a clear exit strategy. And work with the best professionals you can find and afford.
You are better off paying slightly more for speed, flexibility and better service than saving a hundred quid upfront but getting held to ransom later.
Wrapping It Up
Bridge loan costs don’t have to be complex.
Break everything down into monthly interest. Arrangement fee. Additions costs.
Compare those to the benefits of your bridging loan. (i.e. can you buy your dream home, what’s the cost of losing out?)
The key is to be realistic about total costs from day one. Account for all fees, not just the headline interest rate.
Done right, bridging finance can be one of the smartest property investments you ever make even with all those costs.
What’s more important to you; buying your dream home, or a cheaper bridging loan?
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