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Isn’t bridging expensive?

bridging finance Oct 20, 2019

We have brokered hundreds of bridging loans, I also run the UK's best established (only?) training programme (the Ninja Investor Programme) to educate investors in the intelligent use of bridging.  But the minute you mention the word ‘bridging’, people who haven’t learned about it tend to say, ‘that’s expensive!’

Bridging interest rates are higher than most mortgage rates, BUT if the difference is not doing the deal or paying a little bit more and making a good profit then bridging isn’t expensive at all.  I’m always surprised that people prefer to borrow money from a Joint Venture partner rather than from a bridger - and then give away 50% or their hard-earned profits.  No bridger will take 50% of your profit.

The interest rate for your bridging loan depend on a number of factors that you don’t have much influence over.   When you find a deal, you want to bridge that specific deal.  The rate depends to a great extent on perceived risk  i.e. you could bring five deals to the same bridger and get a different rate every time.  As a benchmark say it’s 1% per month.  That doesn’t mean it will be, it could well be lower.  Yes, rates like 0.5% are available, but they are the exception not the rule.

There is no typical term, other than how long you think it will take you to be in a position to repay the bridger, plus another month or two for contingency purposes.

Your aim is to repay the bridger in the shortest time possible - to minimise the cost of the facility.  Bridging loans rarely exceed 12 months, because even significant projects (not developments), can be completed within that time frame.  Just be sensible and don’t think you can repay them sooner than you practically can.

The clauses that are typical if you overrun are penalty clauses, every bridger has them in their contract and usually in two forms.

  1. An arrangement fee - just like you paid at the start of the loan. As you are technically entering a new loan period, bridgers reserve the right to charge you a new arrangement fee for a new term.
  2. Higher rate of interest - this penalty rate is to focus your mind on clearing the loan as fast as possible. 3% pm is typical, but I have seen 5% pm.

These are not applied automatically, depending on the circumstances, the bridger will often take a view i.e. if you overshoot by less than four weeks they may just choose to charge you an extra month’s interest at the original rate.

‘Early redemption fees’ is mortgage terminology that does not exist in bridging. Bridgers love you paying them back early.

As bridging is uniformly used for auction purchases, it is fast.  Bridgers can comfortably complete their loan in under 28 days - as long as your solicitor plays ball and does their bit to push the process along speedily.

If you are inexperienced with bridging, don’t be tempted to go it alone, a simple mistake could cost you dearly.  Use a broker, but not a standard mortgage broker (the majority rarely deal with bridging).  You need a broker who understands the way bridging works and knows which bridgers will best suit your particular project.

If you need help, get in touch; this is an area we know very well.

 

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