Bridging loans are a powerful financial tool, providing quick, short-term funding for property investors purchasing at auction, refurbishing, or bridging funding gaps. While advertised rates may seem attractive, bridging loans often come with hidden costs that investors overlook, potentially reducing profitability if not accounted for carefully.
In this comprehensive guide, we’ll explore the hidden fees associated with bridging loans, ensuring you budget accurately and avoid unpleasant surprises.
What Are Bridging Loans?
Hidden Costs of Bridging Loans Investors Must Consider
Below are the most common hidden costs investors encounter when securing bridging finance:
1. Arrangement Fees
Arrangement (or facility) fees are typically 1-2% of the total loan amount. While common, many borrowers underestimate their impact.
Example:
On a £200,000 bridging loan, a 2% arrangement fee adds £4,000 upfront to your total borrowing costs.
2. Valuation Fees
Bridging lenders require an independent valuation of the property, typically costing between £500 and £2,000 depending on property type and value.
Example:
A residential property valuation could cost around £750, while a commercial or larger property valuation may exceed £1,500.
3. Exit Fees
Some lenders charge an exit fee—typically around 1%—upon repayment of the bridging loan. Always confirm this cost in advance.
Example:
Repaying a £300,000 loan with a 1% exit fee would cost an additional £3,000 at the end of the loan term.
4. Legal Fees
You are usually responsible for both your own and the lender’s legal costs, adding an extra £1,000–£3,000 to your budget.
Example:
Legal fees on a straightforward bridging deal could total approximately £2,000–£2,500.
5. Broker Fees
If you use a specialist bridging broker, their fee typically ranges between 1–2% of the loan amount.
Example:
For a bridging loan of £150,000, a 1.5% broker fee equates to an additional £2,250.
6. Default and Extension Fees
If your exit strategy is delayed (such as refinancing taking longer than expected), lenders charge substantial default or extension fees.
Example:
A one-month extension on a £250,000 loan at an additional 2% per month equates to an extra £5,000 cost.
7. Interest Roll-Up (Compound Interest)
Many bridging loans “roll up” interest payments into the final repayment amount, resulting in interest charged on interest, increasing overall repayment costs.
Example:
A £200,000 bridging loan at 0.8% per month for 12 months compounds to approximately £220,000, including interest.
How to Calculate the True Cost of a Bridging Loan (Example)
Scenario:
An investor secures a bridging loan of £250,000 at a quoted monthly interest rate of 0.8% for a term of 12 months.
Tips to Minimise Hidden Bridging Loan Costs
Compare Lenders:
Shop around or work with experienced brokers who negotiate competitive terms.
Clarify All Fees Upfront:
Insist on a clear breakdown of all fees before agreeing to a bridging loan.
Plan Your Exit Strategy Carefully
Avoid costly extensions by ensuring your refinancing or sale strategy is robust and achievable.
Review the Small Print:
Check terms for default penalties, extension fees, and exit fees closely before signing agreements.
Case Study: Hidden Costs Identified Early
Investor Profile:
James, a property investor from Leeds.
Situation:
James secured a bridging loan of £300,000 at 0.75% per month to buy an auction property. Initially, he only considered the monthly interest payments.
Outcome:
After consulting with Auction Finance, James realised he needed to account for additional costs (arrangement fees, valuation, legal, broker fees). This awareness allowed him to adjust his investment strategy, refinancing promptly after six months to a cheaper buy-to-let mortgage, significantly reducing costs.
FAQs
A: Yes, bridging loans typically carry higher interest rates and additional fees due to their short-term, high-risk nature.
A: Some lenders may negotiate these fees. Working with a specialist bridging broker can help reduce or eliminate certain costs.
A: Not always, but it’s common. Interest can be serviced monthly if preferred, reducing the final repayment figure.
A: Bridging finance can typically be arranged within 1–2 weeks, or even faster in urgent cases.
