With the Bank of England (BoE) increasing the bank base rate to 1% (5th May 2022), how much will it affect bridging loans and can I use a bridging loan calculator to work out how much it will cost?
The UK has finally reached single-digit interest rates for the first time since the Great Recession of 2008. With further raises of the bank base rate expected in the fourth quarter of 2022, how will this affect those seeking a bridging loan?
Stephen Clark from Finbri bridging finance broker says, “We have had an extraordinary amount of stimulus via quantitative easing in the UK over the past 14 years. It’s added somewhere in the region of £895bn according to the BoE. The not so ‘great recession’ of 2008 was just the beginning. Brexit and the pandemic have also added to a huge sum of liquidity that’s floating around in the UK. With historic low interest rates during the same period borrowers have enjoyed cheap credit. That’s all likely to change as the BoE attempts to get to grips with the ever-rising inflation.”
The Bank of England’s Monetary Policy Committee decided to hike the base rate from 0.75% to 1% in May 2022. The number has risen to single digits for the first time in over 18 years.
The Bank of England charges other banks and lenders the base rate when they borrow money, so a raise is likely to alter how much borrowers pay.
If you’re thinking of using a bridging loans calculator then consider this
Calculators such as this bridging loan calculator from Finbri a leading UK development and bridging finance broker are useful offering potential borrowers an indicative cost for obtaining bridging finance. These tools have the ability to break down average fees and charges instantly giving the borrower an awareness of all the different costs to bridge finance. Useful options on Finbri’s calculator allows you to change these variables:
- loan amount
- loan term
- interest type (whether the interest rolled up or paid monthly)
- how many properties that will be used as security
- the value of each property
- the mortgage balance of each property
The bridging loan calculator will then show you the Net loan amount and a breakdown of the loan and all its various costs. For example:
- Broker fees
- Lender facility fee
- Net loan including fees
- Monthly interest rate
- Average monthly interest
- Interest if the loan runs the full term
- Loan to value (LTV)
- Other fees, such as:
- Valuation fees
- Lenders administration fees
- Estimated lender legal costs
- CHAPS Fee
- Redemption administration fee
- Exit fees
However good a bridging loan calculator is, you shouldn’t assume their accuracy. Here’s five reasons why the calculation on this type of tool may not give the same answer as a bridging loan specialist will on the phone:
Your reasons for a loan may be niche
Each bridging loan needs a lender, and if your deal is not attractive to lenders because of its nature, then the rate will be higher. Bridging loan calculators tend to use average loan rates. Arguably if your loan is perfect for many lenders and low risk then the cost could easily be less when you approach a broker or lender.
The bank base rate has changed
As discussed most bridging loan calculators use average interest rates so if the bank base rate has changed or is about to again, then the calculator may not be displaying the latest changes. Speaking with a broker or lender directly is the quickest way to gauge what kind of interest rate your deal may attract.
There may be a better way – you just don’t know it!
Bridging loan calculators only work within set parameters. People and their circumstances rarely fall into set parameters though. So you may think you need ‘x’ when a cheaper alternative would be ‘y’ – and it’s the job of a broker to identify this and offer you information that leads you to obtain the best possible deal.
Your credit circumstances influence your deal
Whilst credit scores rarely impact bridging loans, depending on the loan-to-value (LTV) of your available equity in the property you intend to use as security and the purpose of your loan, a poor credit history may influence the interest rate you’re able to obtain from a lender. A bridging loan calculator can’t work this out.
The bridging loan calculator is technology and sometimes technology goes wrong
Like all technology, sometimes a bridging loan calculator can go wrong. Coding, server updates and human error can all play a part in online tools not working as intended. This is why all bridging loan calculators and all websites tend to have a disclaimer stating that the data cannot be relied upon and should only ever be used as an indicative cost.
What is the purpose of bridging loans?
Bridging loans are short-term loans that are used to offer quick funding. They literally ‘bridge the gap’ between a debt and the availability of a main line of credit.
The most important thing is to show the lender that you have a solid exit strategy so that they can safely approve the loan because they know how and when you will be able to return the debt.
When it comes to land or property, the most common departure strategy is to sell or remortgage, and the lender will want to see proof that your exit plans are feasible.
Bridging loans can be an expensive alternative because lenders charge both interest and fees.
Because they are only intended to last a few weeks or months, interest is levied at a monthly rate rather than an annual percentage rate (APR).
What is the cost of a bridging loan?
When estimating the entire cost of a bridging loan, there are various other components to consider in addition to interest costs. Arrangement fees, appraisal fees, exit fees, and solicitor fees are among them:
Fees for arranging/brokering
Arrangement fees, which are normally a percentage of the loan, are commonly included in bridging loan charges. The normal cost is around 2%, although some lenders may reduce it to 1% if you take out a large loan, and some may waive it totally. If you opt to take out the loan, some suppliers will additionally charge you administrative fees. Keep in mind that you should avoid brokers who charge large upfront fees that are not refundable, as brokers should only be compensated if you are successful. Our advisors only charge if they close a deal, and they will refund any upfront fees if that doesn’t happen.
Fees for valuation
A valuation of the property or properties that the borrower has put up as collateral must be completed before a bridging loan can be established. The cost of this will vary depending on the asset’s worth, location, and the type of appraisal required.
There can be occasions when a desktop valuation will serve, and this will add less to your overall bridging finance expenses than a drive-by valuation (conducted outside the property) or a full on-site value.
Note that if you’re putting up more than one property/asset as security, you may have to pay additional valuation fees because each one will require a separate value.
Fees for leaving
Exit fees should also be considered when calculating the cost of a bridging loan. When a lender removes their charge on a secured property, some (but not all) levy a redemption fee. This is usually around 1%, and it is added to the loan when it is redeemed.
When determining the cost of a bridging loan, both the redemption charge and any solicitor fees are included in the legal costs category.
The lender will hire a solicitor to conduct legal due diligence, and you may be responsible for the cost. This is in addition to your own legal fees, and the total amount you’ll be responsible for will vary.