Cheap Bridging Loan - Is there such a thing?
Yes ... let me explain further as it depends on why you are using a Bridging loan.
The obvious use of a Bridging loan is to raise money quickly for a deposit on a property you are buying, as the sale of your existing house hasn't yet completed, or for some reason, will be delayed.
If you really want to live in that new property, or you have found a great bargain, then unless you have the money sitting around, you would lose that opportunity.
This could be your "dream" home and you will do whtever it takes to make that dream come true - can you put a figure on what is expensive in this case?
Case Study
Recently, I came across a couple who had paid a deposit of several thousand pounds for a property they had bought at an auction. Their mortgage broker could not put the loan in place to complete the deal on time as promised and they were in danger of losing their deposit.
A cheap Bridging loan was quickly arranged to complete the transaction on time. This also bought them a couple of months grace to prepare the property, advertise for a tenant and arrange a new Buy To Let mortgage. Apart from paying for a valuation and the usual legal fees, all the other fees were rolled up and paid back once the Buy To Let mortgage was in place.
All told, the valuation, draw-down and exit fees with the interest rolled up, cost 50% of what they were going to lose by not completing on time - so was that expensive?
To coin a phrase "it was cheap at half the price".
Other uses
Property developers will buy land with outline planning permission using a cheap Bridging loan while they apply for detailed planning consent. The main lender will not lend any money until they have detailed planning permission and a a full breakdown of the development cost. This usually increases the price of the land which more than offsets the cost of using a Bridging loan to secure the deal in the first instance.
Summary
Bridging loans are just another set of financial tools to be used in certain circumstances. No reputable lender wants the hassle of trying to sell a property for someone who has defaulted on payment to get their money back. Unless an exit plan is in place, then the deal would not be done except in very rare and extreme cases.
Compare a Cheap Bridging Loan to Credit Cards
Most people have credit/store cards all with varying degrees of interest rates and charges. It's a minefield trying to keep abreast of the multitude of lenders out there telling you that they alone offer and give you the best rates.
Unfortunately, they give little consideration as to how and when you are going to pay them back. Interest rates charged vary between 10% - 30% per annum depending on the type of transaction and who it was with.
How cheap is a Bridging loan?
A Bridging loan normally has three charging elements within an offer once you have paid for a valuation to be carried out on the property or land that you are offering for security to the lender:
Draw down fee
A draw down fee is basically an arrangement fee to cover the administration cost of setting up the loan, which is normally 1%- 2% of the loan amount (a minimum charge will apply).
Monthly interest
Monthly interest varies from 1.25% - 2% per month depending on whether the loan is on a first or second charge basis and the percentage Loan-to-Value on the property that is offered for security.
Exit fee
An exit fee is charged to cover the administration cost for releasing the charge over the secured property or land ranging from 0.5% - 1% of the loan amount.
An example
Each proposition is looked at on an individual basis and an underwriting manager will make a decision with the terms reflecting the amount of risk to the lender. Say you needed £100,000 for two months and could offer a 1st charge on your freehold residential property worth £200,000. With an interest rate of 1.5% the costs may look like this:
|
Draw Down Fee Loan Period Exit Fee |
1.5% Two Months 0.5% Total |
£1,500 £3,000 £500 £5,000 |
Pointing out the obvious
This cost of using a Bridging loan cannot be looked at in isolation and you need to weigh up the reason for borrowing the money in the first place.
As US business school professor Theodore Levitt famously said, "People don't want 1/4 inch drills. They want 1/4 inch holes".
You have to buy the drill to achieve your goal and maybe never use it again!
To get where you want to be sometimes requires a cheap Bridging loan that you may never use again.
So in answer to the title of this article "Is there such a thing as a Cheap Bridging Loan?"