Bridging loans are quick, short-term loans that can be used to buy properties or fund refurbishments.
Whether you’re a property developer or investor looking to buy a new property before selling your existing one, bridging loans can provide the capital to act fast.
In this article, we’ll talk you through the normal rates for bridging loans, what factors can affect these rates and any extra fees you may come up against.
What Are Typical Bridging Loan Interest Rates?
Bridging loan interest rates are calculated monthly rather than annually, normally because of the short-term nature of the loan.
Interest rates for bridging loans range between 0.5% and 2% per month, which is the same as an annual rate of around 6% to 24%. This may seem high compared to a traditional mortgage, but it’s important to remember that bridging loans are only paid back over a short period, usually between 6 to 15 months.
What Factors Affect Bridging Loan Rates?
The interest rate on a bridging loan will be a direct reflection of the lenders’ risk in the transaction. For loans that are deemed riskier, lenders will protect themselves with higher interest rates.
Here are the factors that they take into consideration when making that decision:
Loan-to-Value Ratio (LTV)
The loan-to-value ratio is one of the most important factors that decide the interest rate. The loan to value is the percentage of the overall property value that the loan is covering.
A lower LTV typically means lower interest rates. For example, bridging loans with an LTV of between 50-60% will usually receive better rates. However, for higher LTVs, rates are likely to increase.
Type of Property
The type of property being financed also affects the interest rate. Residential properties are generally considered less risky (as the market for them is larger) so they normally have lower rates.
Commercial properties are viewed as higher risk and so may come with higher rates of 1.2% to 1.35% per month.
Exit Strategy
Your exit strategy, which lays out how you plan to repay the loan (through selling the property, refinancing with a mortgage or other means), plays an important role.
Lenders will look at how risky your exit strategy is, and may agree better rates if they are confident the loan will be repaid without issue.
Borrower’s Credit History
Lenders will also look at your finances, including your credit score and overall financial health.
A strong financial profile can help you secure a lower interest rate, while a poor credit history may result in higher rates due to the heightened risk.
Speed of Loan
If you need the loan quicker than most, some lenders may charge a premium. The faster you need the funds, the more you might have to pay in interest.
How Is Bridging Loan Interest Repaid?
Bridging loan interest is calculated monthly, but how you choose to repay it can change depending on your loan agreement.
With bridging loans, there are three main ways that interest payments are usually repaid:
Monthly Payments
In this type of agreement, borrowers make monthly payments covering the interest of the loan, but not the principal.
The principal amount is repaid at the end of the term. For example, on a £500,000 loan with a 1% interest rate per month, the borrower would make monthly interest payments of £5,000 and then pay off the rest at the end once they complete their exit strategy.
Rolled-up Interest
With rolled-up interest, no payments are made during the loan term.
Instead, the interest is added to the loan amount and paid in one lump sum at the end. This option is popular with borrowers who need to manage their cash flow. However, this approach means everything needs to be paid at the end, which can be a big financial risk.
Retained Interest
Retained interest is an option where the interest for the entire loan is included at the start. This means that borrowers don’t have to worry about monthly repayments from then on.
Are Bridging Loan Rates Higher than Mortgage Rates?
Yes, bridging loan rates are higher than mortgage rates, but this is mainly because they are so short-term.
While mortgage rates are usually paid across an entire year and sit between 2% to 5%, bridging loans are charged monthly between 0.5% to 2% per month. This may make them seem more expensive, but the shorter loan term means that the interest is just repaid quicker – rather than over a 20-30-year period.
What Other Fees Come With Bridging Loans?
Apart from interest rates, bridging loans come with other fees. These may be slightly different between lenders, but the most common ones include:
Arrangement Fee
The lender charges an arrangement fee for setting up the loan. Normally, this fee is 2% of the loan amount. At Blue Square Capital for example, if you’re borrowing £250,000, the arrangement fee would be £5,000.
Bank Transfer Fee
The bank transfer fee covers the cost of transferring the loan funds into your account. Blue Square Capital charges a flat £25 fee for this service, in order to make sure that your funds are transferred quickly and securely.
Valuation and Survey Fees
Before a loan is approved, the lender will need proof that the property being used as collateral is valued correctly.
Valuation and survey fees depend on the property’s value and the specific needs of the project, but do need to be factored into any budget.
Solicitor Fees
Both you and the lender will need solicitors to draw up the terms of the bridging loan. The cost of solicitor fees depends on how complicated the transaction is.
Admin Fees
An admin fee is charged by the lender to cover the costs of processing your application. At Blue Square Capital, the admin fee is £999, which covers processing from the initial inquiry to final approval.
Why Choose Blue Square Capital For Your Bridging Loan?
Finding the best deal on a bridging loan is more than just finding the lowest interest rate.
At Blue Square Capital, we offer rates starting from 0.95% per month, along with transparent fees that mean you know exactly what you’re paying for. With no hidden charges and a team that works fast, Blue Square Capital is your trusted partner in bridging finance.
So what are you waiting for? Get in touch with us and enquire about a bridging loan today.
