While bridging finance is growing in popularity, not every applicant will appreciate why bridging loan rates are important.
The rates will vary between lenders and they can have a big impact on how much the loan will cost over its full term. Shopping around to find lower rates may mean the bridging finance is cheaper for a potential borrower.
Having said that the rate of interest will vary between lenders, this is generally known as a default rate of interest, though some may refer to it as a concessionary rate.
This terminology is important because you will need to abide by the agreement terms to enjoy these lower rates.
However, should you not stick with the loan’s terms, for example, if you miss a payment then that will be considered to be a default on the loan and the lender may then charge you a higher rate of interest.
The agreement will have a specific interest rate made clear as part of the documentation. For example, the lender may state that their concessionary rate is 1%, but their default rate is 2% should you not abide by their terms and conditions.
Bridging loan agreement
It’s always worth looking closely at any bridging loan agreement you are considering to ensure it meets your needs and there are no hidden fees but, more importantly, that you understand how much you will be charged in total.
While the interest rates are just one of the costs that need to be considered when taking out bridging finance, it is the most important.
Also, the bridging loan interest rate will usually be expressed as a monthly percentage rate. And when this rate is compared to other potential finance financing options – particularly from High Street lenders – it can appear to be high.
It’s for this reason why bridging finance is only really suitable as a short-term funding option.
However, this type of alternative finance is growing in popularity because:
- It is quick to access
- The criteria for acceptance is lower than High Street banks
- The cash can be used for any purpose, such as paying a tax bill
- You will need a security property to access this finance.
How much a bridging finance product will cost
One of the most effective ways to find out how much a bridging finance product will cost is to use the online calculator that most lenders will have on their website.
The rate of interest being charged will vary depending on the size of the loan, the length of the term and there are other considerations too.
For example, most lenders will offer their monthly interest charges to be repaid every month on a bridging loan but many also have a facility to have the interest ‘rolled up’, deferred or retained.
This means there are no monthly payments to be made since the interest is paid when the term ends and the loan is redeemed.
Also, how you intend repaying the loan will affect the rate of interest. If you know when you will be able to pay, then this is a ‘closed’ loan and will have a better rate. If you do not know, then this is an ‘open’ loan and will cost more.
There are other charges that will need to be considered for bridging loans and these are the arrangement fee or the facility fee.
This is an amount charged by the lender on the amount being borrowed and will be included in the loan. The charge will range from 0% to 2%.
Some products will also have an exit fee, which is charged and added to the loan when the borrower redeems it.
Finance company offering bridging loans UK
However, not every finance company offering bridging loans UK will impose an exit fee, so it’s worth shopping around to find a lender not doing so to save on the overall costs.
Other fees on bridging finance include legal fees, so you will have to pay for a solicitor and also the legal costs for the bridging lender to set up the facility. Obviously, the legal fees being charged will vary depending on the lender.
Another fee will be the administration fee that most lenders will add to their agreement.
There are also valuation fees since an independent surveyor will be required to undertake a survey and offer a valuation of the security property being offered for the loan.
It’s worth bearing in mind that this is an upfront fee and will not be added to the loan facility and you will need the valuation completing before the loan is completed.
If you are interested in bridging finance and would like more information about why bridging loan rates are important, then it’s time to speak with the experts at The Bridge Crowd.