How Much Does a Bridging Loan Cost?
A bridging loan is a short-term loan that helps you to buy your new property before you sell your current one. It’s a way to bridge the gap between purchasing a house and selling a current one. Here we will discuss the actual costs of a bridge loan and whether you should take one or not.
If you are wondering what does a bridge loan cost, the answer is not that simple. Bridging loans can be a great way for small businesses to keep their doors open while they figure out what their next steps are. However, there are many fees associated with these loans so it’s important to know what the exact costs of a loan are before you apply.
A common fee associated with a bridging loan is the loan origination fee, which is charged by the lender to cover their costs for arranging and getting the loan approved. There could also be other fees, such as a late payment fee or an interest rate penalty.
The truth is- the loan is always going to cost you money, but it’s important to know exactly how much so you can budget it all in. Many people are taking out bridging loans and paying unnecessarily high fees, but there are ways to keep the costs down. The average cost of them is approximately 2% of the value of the property being purchased.
In the continuation, we will explain some of the common fees associated with bridging loans and how you can avoid them.
Bridging Loan Fees
Typical cost of bridging loan can be higher because they have shorter repayment periods. If a buyer needs a small number of funds to complete on a property and their mortgage is not yet approved, bridge loans can provide the funds they need. Fees vary based on the amount of money you are planning to take out and can include fees.
These fees are calculated on the amount you’re borrowing and then added to the interest rate you were given. The cost will be displayed on your final Loan Summary page before you accept the terms. Please note that this does not include a credit check fee or application fee.
Typically, lenders charge an origination fee for originating your bridging loan to cover their costs in making the loan. Origination fees are typically calculated as a percentage or fixed dollar amount of the loan value.
Don’t forget that these loans are secured by property so be sure you can afford them, so you don’t lose your home.
Product or arrangement fees
A product or arrangement fee is a type of loan fee charged by the lender to cover their expenses in arranging your loan. Because they’re the company that makes the mortgage application, they have costs – including admin and legal fees – you need to pay. These costs are expressed as a percentage so it’s likely you will come across it, as high as 2% of the total amount borrowed.
Bridging loans require origination, processing, and late-payment fees to be paid by the borrower. Other costs may apply, such as stamp duty and other taxes that can be paid in connection with the property prior to settlement.
Broker fees
The broker fee is the fee that you pay to the person or firm that finds you a loan. The broker fee is generally charged as a percentage of your total loan amount and is deducted from your first mortgage payment before it gets deposited into your checking account. The larger the loan, the more significant the broker fee can be.
When you take out a loan, your lender will charge you certain fees for services provided. There are also origination fees, which are paid when you apply for the loan. These fees can add up quite a bit and make up a significant portion of the cost of the loan, so it’s important to understand what they are before you apply.
If you’re looking for a bridge loan, be sure to ask about the fees involved. You may save money by getting a lower rate from one lender and avoiding broker fees from another.
Valuation and survey fees
Lenders may charge valuation and survey fees when they assess the value of a property. These fees are independent of any cost you might incur to get your loan approved, so discuss these fees with your lender to understand what they may be.
Processing fees can be charged at the point of origination and/or at closing and are typically incurred by the borrower. Processing fees include fees for processing your loan, such as an appraisal or title search fees, as well as fees for any product selections you make.
Loan closing costs are your loan amount plus any fees associated with obtaining a mortgage. The most common fees are attorney fees, title insurance premiums, and stamp duty. A real estate appraisal is also required in some situations.
Deposit fees
Bridging loan deposit fees can vary depending on the lender, but they are typically less than 3% of the loan amount. This fee can be added to the interest you pay on your bridging loan, so it’s important to know what it is before you choose a lender.
Exit fees
Exiting a loan is sometimes necessary, but it can be costly. Exit fees are charged by banks and other lenders when you want to leave their loan program.
If you think your lender is trying to charge an excessive or unfair exit fee, it’s worth looking for another option. There are plenty of loan programs out there that don’t have any exit fees at all.
Drawdown fees
Drawdown fees are simply the amount of money you will have to pay when you withdraw money from your bridging loan.
Both drawdown fees and private mortgage insurance (PMI) are common in bridging loans, so it’s good to understand how much they cost you. Drawdown fees are typically around 2-3% of the total amount you borrow. PMI is also around 0.25-0.5% of the borrowed amount, but this fee varies depending on where you live, your credit score, and other factors.
If you take out a bridging loan with a private lender, you’ll probably need to pay for private mortgage insurance (PMI). This fee covers the lender’s loss if you default on your loan.
Solicitor fees
These fees are billed to a client for legal services performed on their behalf. They may be charged hourly, flat, or hybrid. They vary quite a bit depending on the service provider.
Transfer fees
The transfer fee is a fee for transferring a loan from one financial institution to another. These fees generally include arbitration fees and court fees, processing fees, and other administrative costs.
Redemption fees
If you decide to redeem your loan early, you’ll be charged a redemption fee by the lending institution. This fee is calculated as a percentage of the amount redeemed and is charged on top of any interest that was accumulated during the remaining term of the loan.
Redemption fees will most often be around 3% of the outstanding balance on the bridged loan, but this can change from lender to lender.
When to Pay the Bridging Loan Fees?
Different fees are paid at different times depending on the fee type. All of the deadlines are always stated in your contract so be sure to read it out carefully.
How Is Bridging Loan Interest Calculated?
Bridging loans can be taken out for a period from one month to six months, but the typical time is three to five months. This is because such loans are tied to the expected closing of a property purchase or sale. The interest rate is charged on bridging loans using the bridge loan cost calculator, which calculates the initial fee and the interest rate.
Is a Bridging Loan Expensive?
Origination and interest rate fees are common on bridging loans. You may also need to pay an annual percentage rate (APR) fee and a late payment fee. Also, don’t forget about bridge loan closing costs which are paid when finalizing the loan.
Banks charge an origination fee when they approve your application for a loan. This is usually around 3%.
Since bridging loan providers allow you to use your own home as security, they will not request a guarantor. However, they do charge high-interest rates. Interest rates and fees charged on a bridging loan can range from 5% to 9%.
To understand how much you will pay in interest during the course of your loan, it’s important to look at both origination fees and interest rates. The annual percentage rate (APR) fee is the total cost of borrowing money over the course of a year, including both of these fees.
If you don’t pay your bridging loan on time, your bank may charge you a late payment fee. The penalty for late repayment is often 10% of the amount missing and this can quickly eat into the savings you hoped to make.
How to Get a Low-Cost Bridging Loan
If you need money but don’t want to pay overdraft charges, a low-cost bridging loan can help you access funds quickly. Average cost of a bridge loan interest rate is around 10%, but the APR you pay may be higher. Not only are their rates competitive, but they can also be used for other short-term uses including helping with a deposit on a house. A low-cost bridging mortgage is also good if you have equity in your home as it acts like another form of collateral to secure your loan.
Bottom Line
In conclusion, if you are planning to take a bridge loan just know that the different rates and fees can be quite high. Nonetheless, they can still be a great option if you need quick access to cash. While we cannot tell you what to do, we gave you a good in-depth review of these costs so you can make the best decision possible for your personal situation. If you need any help in this process, we recommend you find an experienced financial advisor to help you out.
