The first question a prospective bridging borrower is concerned with is how much the monthly interest rate is. Yes, this is a significant consideration when evaluating the options available to the borrower but it fails to consider a number of aspects that can hike up the cost of bridging. In fact, in many cases it may be cheaper to have a higher rate of interest in order to benefit from fewer costs elsewhere. Avoiding certain pitfalls including exit fees, renewal fees, completion fees, can save unnecessary fees if you know where to look.
For most lenders of bridging finance, a key consideration to their lending policy is where the proposed security is located. Generally, the closer to London, or the South East, the cheaper the bridging will be. Most will not, for instance lend in Scotland allowing for those who do to charge all manner of exit fees, extra option fees, and any other contingent fees they deem suitable for the risk involved. This risk is reflected by a higher interest per month, which for typical bridging can reach over 1.5% per month.
What one needs to be wary about is simply making a decision based on this headline interest rate as these other fees can easily dwarf this. For instance, borrowing ￡600,000 on a house in London, for three months, at 65% loan to value would tempt a number of lenders. One lender would on the one hand lend at a headline interest rate of 0.75%. On the other hand, another lender would do 0.89%, so on the face one would choose the first lender. However, the first lender is charging an exit fee of 1.20%, whilst the second charges 0.50%; the per month interest overall works out at 1.15% against the second at 1.06% or an overall saving of ￡1,620. This may not seem a huge amount, but add another 9 months to the term and alter the percentages, and quickly it's a difference nearing 5 figures.
Another important consideration is renewal fees. The importance of this will weigh heavily on the confidence of the borrower to repay within the agreed initial term. Some lenders charge no fee, whilst others who have low headline rates will charge a one off fee, keeping the same interest rate, or a rate increase of 1%. Thus after failing to sell the house after 3 months the lender offering 0.89% may increase their rate to 1.89%, whilst the other may simply add a 1% renewal of the gross amount, which could mean the 0.75% lender is cheaper if you run over 3 months. This makes it important to be realistic about the term of the loan and not be over confident.
The exit fee is another fee to be wary of, and one fee that not all use and can make the overall cost of one lender more than another when considering headline rate and facility fee. Whilst these costs are most significant, others, such as valuation fees, survey fees and valuation fees are also areas where costs can be increased unnecessarily. The nature of bridging finance and the numerous lenders involved make sifting the best deals a complex task. There is also an amount of preferential treatment for brokers over the general public in terms of rates and allowable LTV as which can be not only save time and money through comparison but also provide better deals than you would get going directly to the lender.
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