Getting a bridging loan (also known as bridging finance) is seen as a crucial first step in purchasing a new home or a possible property for development. However, it’s common knowledge that interest rates on these short term loans tend to be considerably higher than for more conventional instruments such as mortgages.
This fact has deterred many from considering bridging loans. But the best thing to do is to actually ask around and see which lenders offer the most reasonable rates for loan interest.
Even when you already know where to ask, it always helps to know how these interest rates are calculated. Doing so can give you leverage when you choose to apply for a bridging loan.
So, how exactly do you compute for the best bridging loan interest rates?
What To Know About Bridging Loan Interest Rates
As stated earlier, the interest rates for bridging finance are higher than most loans.
Also, these already come with an arrangement fee of approximately one per cent of the total amount availed of, along with standard interest of another one percent a month.
As bridging loans only apply for a short period of time – usually between six months and a year – most carry an interest rate of about two percent of the above fixed rate product.
These also come with a fairly high closing cost.
When it comes to interest rates, keep in mind that the total value will be dependent on just how much you’re applying for.
Example of computing bridging loan rate
Here’s a concrete example.
In the case of a conventional loan of over £2 million, interest may be pegged at around 0.35 percent monthly. For loans under £2 million, a borrower may expect a slightly higher monthly interest rate of around 0.37 per cent.
On the other hand, a bridging loan of around 55 per cent loan to value (LTV), you can expect to see an interest rate of approximately 0.44 percent monthly. In which case, interest rates for bridging loans of 65 percent and 75 percent LTV will see interest rates of 0.54 per cent and 0.64 per cent a month.
Keep in mind, though, that these rates are not standardised. These may be determined by current rates with your lender of choice. Consequently, this would give you a potential range of between 0.43 and 0.73 per cent to between 0.48 to 0.84 percent.
Again, these figures depend on the lender you choose.
You should also be aware that, aside from monthly interest, bridging loans also involve several costs. These costs may include a facility or lender’s arrangement fee, an exit fee, administration fees, valuation fees, and legal fees whenever applicable.
Use A Bridging Loan Calculator
The best way to determine how much you stand to pay in terms of monthly interest is to check whether or not your potential lender has a bridging loan calculator available.
These handy tools take much of the guesswork out of the application process and pretty much give you a ballpark figure that you feel comfortable.