Cost of a Bridging Loan
Like most forms of financing, when it comes to the cost of a bridging loan, “expensive” is a matter of perspective. Bridging finance provides property buyers, investors, and homeowners with some unique benefits. But since it’s up to the individual to decide whether the cost of those benefits is worthwhile, the real question is: how much value do you place on funding that can be accessed quickly and painlessly?
In determining whether cheap bridging loans are, in fact, ‘expensive’, some people make the mistake of comparing bridging finance options against alternatives that are entirely unrelated. Different loan types are intended to serve different purposes. And one of the first rules when applying for any loan is to make sure it’s the right one.
You wouldn’t seek a car loan when you’re planning a new kitchen or bathroom. So why would you compare a high-interest payday loan, for example, to a home loan bridging finance that can help you cover an auction property or land purchase, refurbishment project, or delay in your mortgage?
Bridging loans and payday loans are different in every sense. While bridging finance solutions are essentially short-term mortgages secured agains
t an asset, a payday loan is a high-interest, unsecured loan.
Not only are they designed to bridge a temporary cash shortfall when buying or refinancing a property, the best bridging loan deals are now competitive with most high street mortgages – assuming they are for properties in good condition.
Moreover, while the lending level for bridge funding is usually dictated by circumstances, you can often borrow as much as 75% of the secured property’s value, with the typical bridging loan APR (annual percentage rate) topping out at 12% but can be as low as 6% in some circumstances.
Payday loans, on the other hand, are designed to provide much smaller amounts of interim funding, and are subject to stiff default fees and significantly higher interest rates. According to the Money Advice Service, the APR for a payday loan could reach as high as 1500%!
The costs associated with payday loans can quickly spiral out of control – turning them into problem debts for many people. So, it’s hardly surprising that money experts caution against taking out a payday loan unless you’re certain you can repay it on time and in full. Comparatively, bridge loans are capped at a max loan to value and therefore the costs are fixed and cannot spiral out of control unless the borrower fails to comply with the facility agreements
It’s often advisable to have cash or finance in place before you attend a property auction – especially since a deposit will be due immediately upon making a purchase. Admittedly, specific auction bridging finance can be slightly more expensive than a traditional mortgage. But the reality is that most auction properties are either not mortgageable, or have a timeline in which a mortgage is not deliverable. With that in mind, it’s the efficiency with which quick bridging loans can be arranged that remains one of the biggest benefits for auction buyers.