Bridging loans can be an effective solution when you need fast access to property finance, but they come with higher costs and a different risk profile compared to traditional mortgages. Before applying for a residential bridging loan, it’s important to understand the full financial implications and ensure you have a solid plan in place.
In this guide, we’ll explore the typical costs involved, the key risks to be aware of, and how to avoid common mistakes when using bridging finance.
What Are the Main Costs of a Bridging Loan?
Bridging loans are short-term by design, and their pricing reflects the flexibility and speed they offer. Here are the most common costs associated with a residential bridging loan:
1. Monthly Interest
Unlike mortgages that charge annual interest, bridging loans typically apply interest monthly. Rates usually range from 0.5% to 1.5% per month, which adds up to 6% to 18% annually.
Some lenders offer options to “roll up” or “retain” interest, meaning you won’t pay monthly but will repay it all at once at the end of the term. While this helps with cash flow, it increases your repayment amount later.
2. Arrangement Fee
Most lenders charge an arrangement fee for setting up the loan, typically between 1% and 2% of the loan amount. This fee is often added to the loan total rather than paid upfront.
3. Valuation Fee
A surveyor will assess the property’s value to determine how much you can borrow. Valuation fees vary based on property type and location but generally range from a few hundred to a few thousand pounds.
4. Legal Fees
Both the borrower and the lender will have legal fees to pay. These include the costs of reviewing contracts, registering charges, and completing due diligence. Legal fees can range from £1,000 to £2,500+, depending on complexity.
5. Exit Fee (Sometimes)
Some lenders charge an exit fee when the loan is repaid. This might be a flat rate or a percentage (usually around 1%) of the loan amount.
Additional Charges to Watch For
- Broker fees: If you’re using a finance broker, they may charge you a fee for their service.
- Admin or completion fees: Some lenders charge administrative costs upon funding.
- Default interest: If you miss the repayment deadline, interest rates can rise significantly—often by an additional 1% or more per month.
What Are the Key Risks of a Bridging Loan?
While bridging loans offer speed and flexibility, they also carry risks that borrowers must consider carefully.
1. Short-Term Nature
Bridging loans typically last 3 to 12 months, though some can go up to 24 months. If your exit strategy fails or takes longer than planned, you could face penalties, higher interest costs, or even default.
2. Higher Repayment Obligation
Because many bridging loans are interest-only and rolled-up, the full repayment is due at the end of the term. If you don’t have the full funds ready, you may need to refinance or sell quickly, which can be stressful or financially limiting.
3. Risk of Repossession
Bridging loans are secured against property. If you default, the lender has the legal right to repossess and sell the asset to recover their money.
4. Market Fluctuations
If property prices fall before you can sell or refinance, your equity may be reduced. This can affect your ability to repay the loan, especially if you were relying on a profitable sale.
5. Overestimating Exit Plans
Many borrowers intend to sell or refinance the property quickly, but delays happen. Planning to flip a property, secure a new mortgage, or wait for a sale can be unpredictable. Overreliance on timing can backfire.
How to Minimise Risk
To ensure your bridging loan experience goes smoothly, take the following precautions:
- Define a realistic exit strategy. Whether it’s selling a property, refinancing with a mortgage, or using other capital, your repayment plan must be clear, achievable, and time-bound.
- Account for delays. Build in a time buffer. If you think you’ll repay in 4 months, apply for a 6–9 month loan to be safe.
- Understand the full cost. Ask for a complete breakdown of fees, interest, and charges upfront. Compare multiple offers to find a competitive deal.
- Work with experienced professionals. Use lenders and brokers who specialise in bridging finance. Their insight can help you avoid costly mistakes.
- Review your loan documents carefully. Check for clauses about penalty interest, early repayment charges, and exit terms.
When Bridging Loans Make Sense (Despite the Costs)
Despite their higher costs, bridging loans serve an important purpose in property transactions. They’re often worth the expense when:
- You’re buying at auction and need fast funding.
- A sale falls through and you need to complete your purchase.
- You’re renovating a property to sell or refinance at a higher value.
- Traditional lenders won’t approve a mortgage due to property condition or lease length.
Used wisely, bridging loans can unlock opportunities and help you act decisively in fast-moving markets.
Final Thoughts
Bridging finance isn’t cheap—but it’s not designed to be. It’s a specialist tool for short-term situations that require speed and flexibility. As long as you understand the costs, plan your exit carefully, and work with a reputable lender, a residential bridging loan can be a smart solution to a complex financial need.
Before you commit, weigh the potential risks and ensure the loan structure fits your timeline and repayment strategy. When used correctly, bridging loans can give you the advantage in competitive and time-sensitive property deals.