Bridging loan finance is a short-term loan solution for those in financial need. These types of loans are often used when borrowers are looking for and securing long-term financing.
Although bridging loans are easier to acquire than other types of financial assistance, it is important to recognize that they often come with much higher interest rates than traditional loans. Understanding these rates is important when it comes to making a decision regarding bridging loan finance.
What are Bridging Loan Rates and How are They Determined?
The rates for bridging loan finance are the daily or monthly interest that is charged to a borrower while the loan is outstanding or before it is repaid in full. There are many factors that determine a bridging loan’s rate including loan amount compared to property value, the applicant’s credit, and what type of security was used to obtain the loan.
Rates are also determined by what type of loan was issued – closed bridging loans are ones that were arranged with a strong exit or repayment strategy and open bridging loans are those with a less firm or less secure exit strategy for repaying the loan.
What are Bridging Loans Used for?
There are a number of ways in which bridging finance can be used. The most common of these is when an individual is trying to sell his or her current property but are in the market to purchase a new property right away, such as development contractors.
If the existing property has already been sold but the final paperwork and payment is not complete, this would be considered a low risk, closed bridging loan – the exit strategy for this type of loan would be the payment for the property.
If the current property is on the market but has not been sold yet, the loan would be considered an open loan – this means that the plan is to repay when the property is sold but there is no guarantee of when that will take place.
Other Factors that can Influence Bridging Loan Rates
Although loan rates are determined by the factors above, there are some other influencers that will also affect the loan. Rates can be influenced by the Bank of England Base Rate. This rate can vary depending on economic circumstances and often ranger between 0.65 and 1.5 percent per month, which needs to be factored into a bridging loan which generally runs between a zero and 12 month loan.
Some additional criteria for applying for a bridging loan includes the loan being worth between 75 and 100 percent of the Loan to Value, an arrangement fee of between one and two percent, no exit fee, and no minimum repayment terms.