Hi, this is Tom Soane and welcome to another episode of the anonymous landlord and today I saw a question from Sharon and Sharon wanted to find out a bit more about bridging loans and bridging finance but specifically about how much a bridging loan is going to cost, what the monthly repayments are, what the other fees that she’ll have to pay will be and you know what it’s such a common question.
And, I realized that a lot of people don’t fully know the ins and outs of bridging loans and bridging finance compared to a buy to let mortgage and I see a lot of property investors try and buy a property with cash and then refinance it once they’ve done a job to it, so a bridging loan is a really really good way to get a property deal purchased so that you can then refurbish it and refinance it and make some profit or maybe you’re going to refurbish it and then sell it but a bridging loan is a really good way to get that done without needing so much cash yourself, but there are some definite costs you need to know.
Now, first of all there are monthly repayments, now that’s varied across different lenders some lenders will be more cautious than others but some people be more expensive than
others of course, they will that depends on a number of things first of all you, your own circumstances whether how credit worthy you are, believe it or not your experience as a property developer but the actual cost involved is going to be a calculation. Sometimes it’s worked out daily and other times it’s worked out monthly and I’ll give you an example, if the annual percentage rate of a bridging loan is what 10% for an example. Then each month you will have to pay naught .83 of the loan amount each month and that will be the repayments that you will make until you pay off that bridging loan. Similarly some bridging loans are calculated on a daily basis. Now, if it is calculated on a daily basis, it works out to be something like naught point, naught, naught, two seven. Don’t quote me on the actual figures, but you can work it out it’s basically 10% divided by 365 days and yeah, so it’s naught point, naught, naught, two seven I think it is, and that will accumulate you’ll probably make monthly payments still but it might be slightly different, so always know it should be in your paperwork actually how much the bridging loan lender is going to charge you but also how they’re going to calculate that amount and that will let you put that into your forecast and a quick extra tip on that if you think that from completing the purchase to completing either the resale or the refinance if that’s going to take you I don’t know six months then you’ll have to pay six months of bridging loan payments, of course that’s pretty obvious.
However, some bridging loan lenders will have a minimum number of payments that you have to make so you need to know that too and I’ve seen some bridging loan lenders charge a minimum of 12 months payments, but then refund the difference so put that into perspective if they charge you a minimum of 12 month payments, but you don’t use all that 12 months to refinance or sell the property they’ll refund you the six months that you don’t use.
Hopefully that makes sense but again, there’s different criteria for different bridging loan lenders, so there’s your monthly payments or your interest payments. Normally they are interest payments, of course, you don’t tend to pay off the capital of a bridging loan. I think you can do I think there are options where you can start paying off that capital monthly but on Sharon’s example. Sharon wanted to find out what the repayments were going to be across a hundred and fifty thousand pounds bridging loan.
Now, look very roughly I worked it out as roughly nought point eight percent per month which equates to1,200 pounds per month as a payment so she have to pay six payments of that. That’s going to be what 7,200 pounds, is that right? Something like that 7,200 pounds six months maybe a bit more. So anyway, yeah, so that’s what Sharon would have to pay. Now, there are some other fees involved which you do need to know about.
Number one, there’s always normally arrangement fee and that can be around two percent of the loan so it’s very expensive to take out bridging finance but it’s also very short term, so it’s well worth it if you build it into your forecast and you make an offer taking into account the amount you’ll have to pay for the bridging loan facility and look on that exact example Sharon’s going to have to pay 1,200 pounds for six months, plus that 7,200 pounds over six months plus 2% of the of the loan which is going to be another three thousand pounds, so Sharon gonna have to pay 10,200 pounds in bridging loan finance costs and there are a few other little bits to take into account. Bare in mind by the way, the arrangement fee of figure.
Now, you may well also have to pay for the survey nine times out of ten you will and nine times out of tenor chartered surveyors valuation, more often than not it’s a chartered and again all these costs don’t worry about how much the actual cost. Don’t worry about the actual monetary value of that of that fee or the cost because you build it into your offer. It’s just a number, it’s not an amount of money it’s just a number remember that and that number contributes towards the offer that you’re going to make on that property in order to make it a viable investment. You always remember that, that’s like a rule to live and die by really is make sure that you’re always calculating your costs and fees into the offer you’re going to make and don’t compromise on that it’s got to be a profitable investment.
Otherwise, there’s no point investing your money in it, so yeah, survey you might also have to pay. Now, another cost which is again different between lender to lender is the legal fees, sometimes believe it or not you have to pay the lenders legal fees in order to complete the purchase with a bridging loan.
I know it might sound really crazy, but I get it you know, it’s not the bridging loan lenders place to I guess pay for your legal fees, right? I get it but I disagree with it if that makes any sense, so yeah take those into account so there are a load of fees and a load of costs that are involved there and then Sharon’s example, she’ll end up paying 10,200 pounds in interest payments over six months and also in an arrangement fee so remember those costs there may well be a valuation fee or a survey feed depending on the lender then may well be legal costs as well plus now, here’s one that everybody gets caught out with if you’re using a mortgage broker or a mortgage advisor to arrange this bridging loan and then you’re going to refinance the property, once you’ve done a refurbishment or something like that. Then you’ll need to pay that mortgage advisor twice unless they do a special deal but generally speaking and please don’t begrudge a mortgage advisor from getting paid twice.
They do a lot of work for you. You’d be amazed at the amount of admin they put in for your application it’s quite often nearly a day’s worth of work overall for them to get that through and if they charge you three hundred quid, I think that’s a fair rate for a mortgage advisor who spent years trying to get qualified experienced.
Anyway, I’m very pro mortgage advisor, by the way, the good ones, there are some really lazy, easy, dodgy, crap one’s around but there are also some really good mortgage advisers and by the way, if you are a mortgage advisor listening to this, then please do and sharing advice and tips and I will give you the opportunity to promote your business as well if you come onto the podcast, I think it’s good to get a few different perspectives from mortgage advisers about bridging loans and buy to let mortgages and different types of lending and borrowing and criteria.
Anyway, I’ve drifted off, so there’s all those fees that you’re going to calculate there, make sure you build them into your offer and don’t deviate from making profit. Don’t try and negotiate higher and higher and higher and higher just because you really want the property when it comes off of your bottom line, it comes off of your profit and hopefully this helps understand a bit more about bridging loan. Bridging loans are fantastic if you use them properly, and I hope that helps everybody.
My name is Tom Soane please let me know what you thought of this episode email me at email@example.com My name’s Tom Soane and this is the Anonymous Landlord.