Calculating the costs of a bridging loan: Tips and tricks for borrowers

Bridging Finance has become an increasingly popular option for borrowers who are looking for fast access to funds to finance their property purchases. A bridging loan is a short-term financing option that is typically used to bridge the gap between the purchase of a new property and the sale of an existing property. However, as with any loan, it’s essential to understand the costs associated with a bridging loan before taking one out. In this article, we’ll explore how to calculate the costs of a bridging loan and provide some tips and tricks for borrowers.

How much can I borrow as a bridging loan?

The amount you can borrow with a bridging loan will depend on the value of the property you are purchasing or using as security for the loan. Typically, bridging lenders will lend up to 70-75% of the value of the property. However, some lenders may offer higher loan-to-value ratios if the borrower has a strong credit history or if the property has a good potential for capital appreciation.

Bridging lenders also take into account the exit strategy when determining how much to lend. The exit strategy is the plan for how the borrower intends to repay the loan, such as the sale of the property or the refinancing with a long-term loan. The exit strategy needs to be viable and the lender will typically want to see evidence of this before approving the loan.

How are bridging loans calculated?

Bridging loans are calculated based on the loan amount, interest rate, and fees. The interest rates for bridging loans are typically higher than those for traditional home loans, as they are a short-term financing option. The interest rate will depend on the borrower’s credit score, loan-to-value percentage and the risk associated with the loan.

In addition to the interest rate, there may be fees associated with the loan, such as arrangement fees, valuation fees, and legal fees. These fees can vary depending on the lender, the loan amount, and the property’s location.

To calculate the cost of a bridging loan, borrowers can use a bridging loan calculator. A bridging loan calculator is an online tool that allows borrowers to input their loan amount, interest rate, and fees to determine the total cost of the loan. Using a bridging loan calculator can help borrowers to understand how much they will need to repay and how the interest rate and fees will affect the loan’s cost.

How much deposit do you need for a bridging loan?

The deposit required for a bridging loan will depend on the LTV of the loan. As mentioned earlier, bridging lenders will typically lend up to 70-75% of the value of the property. This means that the borrower will need to contribute the remaining amount as a deposit. For example, if the property is valued at £500,000, and the loan-to-value ratio is 70%, the borrower would be able to borrow up to £350,000. The borrower would then need to contribute £150,000 as a deposit.

Is a bridging loan expensive?

Bridging loans are typically more expensive than traditional home loans. However, they can be a useful tool for borrowers who need fast access to funds to finance their property transactions. The cost of a bridging loan will depend on the loan amount, interest rate, and fees. The interest rate for a bridging loan can be as high as 1-1.5% per month, which equates to an annual interest rate of 12-18%.

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