What Are the Costs of a Bridging Loan?

If you need access to a large sum of money quickly, a bridging loan could provide a practical short-term solution. Whether you are buying a new property before your current one has sold, funding a renovation, or snapping up a time-sensitive deal at auction, bridging finance can help you act fast.

However, bridging loans do come with a range of costs and fees that are often higher than traditional mortgages. Here’s a breakdown of what to expect and how to keep your borrowing as cost-effective as possible.

Why choose a bridging loan?

Bridging loans are most commonly used in property transactions, especially when there’s a timing issue to overcome. For example, if you are downsizing and have equity tied up in your current home, a bridging loan can help you complete on your next property without having to wait for a sale.

They are also popular among investors, developers, and buyers looking to move quickly or renovate a property that would not yet qualify for a standard mortgage. In these cases, speed is often the biggest advantage.

What fees are involved?

1. Interest rate - Bridging loans usually charge monthly interest, typically between 1% and 2%. Because they are short-term loans, the interest is calculated differently to traditional mortgages. The total cost adds up quickly if the loan runs for longer than planned, so knowing your exit strategy is crucial.

2. Deposit - Most lenders will require a minimum deposit of 25% of the property’s value. Some may go higher, depending on the level of risk. A bigger deposit could help you secure a lower interest rate.

3. Product or arrangement fee - This is the lender’s fee for setting up the loan. It is usually between 1.5% and 3% of the loan amount and is often added to the loan rather than paid upfront. Larger loans may attract lower fees, but this varies between lenders.

4. Survey or valuation fee - Lenders will arrange a valuation to confirm the property is worth the amount you wish to borrow. The cost depends on the property’s value but typically ranges from £250 to £1,000.

5. Redemption fee - Once the loan is repaid, a redemption fee covers the cost of removing the legal charge from the property. This is generally between £100 and £150.

6. Legal fees - As with any property loan, legal work is required. In bridging finance, you will often need to pay the lender’s legal fees as well as your own.

7. Drawdown or admin fee - Some lenders charge an admin fee for releasing the funds. This typically ranges from £300 to £500.

8. Exit fee - While many bridging loans allow early repayment without penalty, some lenders charge an exit fee. This is usually around 1% to 1.25% of the loan.

9. Telegraphic transfer fee - This covers the bank’s cost of sending the loan funds to your solicitor and usually costs around £25.

10. Broker fee - If you work with a specialist broker, there may be a fee involved. This could be a fixed cost or a percentage of the loan, usually between 0.5% and 2, I will always make this clear from the outset.

When are fees paid?

Some fees, such as legal, survey, and broker charges, are typically paid upfront. Others, including arrangement fees and interest, can often be added to the loan and paid when the loan is repaid. Keep in mind that adding fees to the loan means you will also pay interest on them.

How is interest paid?

You can choose how to manage interest payments:

• Monthly payments: You pay the interest each month, so only the original loan amount needs to be repaid at the end.

• Deferred interest: The interest builds up and is paid in full with the loan at the end of the term.

• Retained interest: The lender calculates the total interest in advance and adds it to your loan. If you repay early, you may receive a refund for unused interest.

For regulated loans (those secured against your main home), the interest is usually repaid in full at the end. Unregulated loans offer more flexibility and may allow monthly or deferred options.

What about stamp duty?

If you use a bridging loan to buy a second property before selling your first, you will need to pay the additional stamp duty surcharge that is between 3% and 4% of the purchase price, depending on the location of the property within the UK. However, this can be reclaimed if you sell your previous home within three years of completion.

How can you reduce bridging loan costs?

You may be able to lower your costs by:

• Offering more than one property as security

• Providing a larger deposit

• Having a strong credit history

• Using a first-charge loan rather than a second-charge loan

I can guide you through these options and help you decide which route is most cost-effective.

Need help with bridging finance?

Bridging loans can be incredibly useful in the right situation, but they are not cheap and should always be considered carefully. If you want advice on whether bridging finance is suitable for your circumstances please get in touch.

The FCA does not regulate some forms of Bridging Loan mortgages