How Much Does a Bridging Loan Cost?

Bridging loans can be a quick and easy way to get the finances you need to secure the purchase of a property, avoiding the often lengthy process of applying for a traditional mortgage.

Generally, bridging loans have a higher rate of interest than a traditional mortgage or loan, which can make them seem an expensive way to borrow money. However, the important thing to remember is that a bridging loan is only ever designed to be used as a short-term measure. Unlike a mortgage, a bridging loan is designed to be used for 3 to 24 months. The advantage of using a bridging loan is that you can receive your loan quickly in order to secure the purchase of a property.

How much does a bridging loan cost?

The interest on a bridging loan starts from just 0.44% per month. However, depending on level of risk associated with the loan or your credit status the interested may be higher.

For example:

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Client A is looking to refurbish a property which is on the market for £100,000 and then resell. The property needs £50,000 of refurbishments and it will take around 6 months to complete. He agrees in principle a bridging loan of £150,000 at an interest rate of 1% per month. With a bridging loan he becomes a cash buyer and is able to negotiate the property down to £90,000, so he now takes a bridging loan of £140,000. Every month he will pay £1,400 in interest, so the loan will cost him £8,400 in total interest while he renovates the property. Now that the house is renovated he sells for £190,000. Now he can pay the loan back in full and he has made a profit of £41,600 on the property.

It is worth noting that other fees such as the lender fee (2%), the broker fee (1%) and any additional solicitor and valuation fees you incur are payable on top of your interest.

How does this compare to the price of a mortgage?

There are a lot of factors that can affect the rates of a bridging loan and a mortgage, but generally a bridging loan will have a higher rate of interests. This does not mean that bridging loans are always the more expensive option. Bridging loans are only used for between 3 to 24 months, where as interest on a mortgage is usually paid for around 25 years.

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A mortgage is a good option for anyone looking to borrow money long term, paying off the purchase of a fist property for example. Whereas a bridging loan offers a quicker way for property investors or owners to bridge the gap between one property and another.

For example:

Client B wants to downsize from a £500,000 property to a smaller £350,000 property.  Instead of selling and then having to rent in the interim or apply for a mortgage and risk missing out on the house they want, they choose a bridging loan. They take out a loan of £350,000 to buy the new property, knowing that they will pay it off in full once the original property is sold. They borrow at an interest rate of 1% for 3 months, until the first property is sold. Their total interest payment is £10,500.

There are lots of factors that can affect the rates on a bridging loan and if you have questions the best thing to do is seek advice from a professional. By getting in contact with a bridging loan broker like Octagon Capital you can feel confident that you are getting the best possible terms and rates on your loan. Different lenders will offer different rates and terms, using a bridging loan broker means you can explore all these options and find the best loan.