The Rates and Costs of a Bridging Loan

Bridging loans are vital tools in the arsenals of investors and businesses. Short-term funding provides the flexibility and speed needed to secure capital and fill potential funding gaps.

It’s why a record-breaking £831 million in bridging loans were transacted in 2023, with the market expected to rise in value in the years to come. Like any loan, businesses must consider the costs of their bridging loans, as rates are typically much higher than longer-term funding types.

In this comprehensive guide, we discuss the current state of the bridging finance market and the rates you can expect to encounter.

The costs of a bridging loan

Bridging loan costs are much higher than long-term financing options. It’s the trade-off for their speed and flexibility. Plus, lenders must make a profit when average loan terms are anywhere from one month to three years.

Unlike other loans, bridging loan interest rates are calculated monthly rather than annually. The average annual cost of bridging loans can reach double figures in percentage terms.

Businesses must also consider the extra fees in setting up and maintaining loans, which can add a few more percentage points to your total lending costs. Calculating the overall price of bridging finance is vital in determining whether this is the lending option for you.

What bridging loan fees apply?

Several types of fees apply to bridging loans in addition to the interest charged. Regardless of how strong your application is, fees are a standard part of taking out a bridging loan. Here’s a breakdown of the costs you can expect to pay:

You may also have heard of exit fees. These are the costs of paying off your loan, and whilst they used to be a standard part of the lending market, they’re relatively rare these days. The same goes for broker fees. If arranging your loan through a broker, the broker also takes a fee, but the lender nearly always pays this.

What are the typical rates for bridging loans?

Typical rates for bridging loans depend on a range of factors. However, the general range of bridging loans is 0.4% to 2% per month. To put it into perspective, a 0.4% monthly rate would correspond to 4.8% in simple interest annually. In contrast, 2% per month adds up to 24% per year.

As you can see, the difference in rates and the conventional method of quoting interest rates monthly instead of annually means getting a better rate could add up to tens of thousands of pounds.

If you’re unhappy with the rates offered, you may be able to negotiate with the lender by leveraging the strengths in your application, such as a great credit score. You can also use multiple competing offers to convince your lender to offer you a better deal.

Bridging loan interest rates

Bridging loan interest rates are calculated based on several factors. Thankfully, nearly all of them are under your control, meaning you can make considerable savings if you can strengthen your application.

Note that lenders may offer both fixed and variable interest rates. Each option has pros and cons, so evaluating each option before choosing one lending product or another is essential.

When do you pay bridging loan fees?

Most bridging loan fees are paid upfront. Costs like arrangement fees, legal costs, and valuation fees must be paid as a condition of receiving your funds. Any extra fees, such as early repayment penalties, are paid at the end.

Regarding interest, although you repay the loan principal at the end of your term, interest rates may be paid throughout the term or rolled up and paid at the end. Many businesses prefer to roll up their interest to avoid cash flow pressures while working on their projects.

Is there an exit fee for a bridging loan?

Exit fees used to be a common part of bridging loans. Essentially, they were an extra cost imposed on the borrower for the privilege of repaying your loan. Like arrangement fees, they could be as high as 1-2%. However, as the market has grown more competitive, exit fees have largely become a thing of the past.

It's extremely rare for UK lenders to charge exit fees. Generally, if you encounter a lender trying to add exit fees to your loan agreement, it’s better to go elsewhere, as these can add thousands to the overall cost of your loan.

The same goes for broker fees. Since the bridging loan brokerage market grew in competitiveness, it’s become standard for brokers to charge their fees to the lender rather than the borrower.

We understand that all these fees, rates, and other extra costs can be a headache for businesses, especially if you’re unfamiliar with bridging loans. At Hilton Smythe, our team of experienced financial brokers are there to support you in sourcing low-cost bridging loans that align with the needs of your business. To find out more, contact the team now.