Debt Financing - The Costs of Using Bridging Loans
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with Rory O'Mara
Rory is the Owner of Closed Bridging Finance which provides bridging, development, HMO and Auction Finance from £26,000 to £1M for both commercial and residential property.
Typical rates for Bridging Loans are typically around 1% but as with any kind of debt financing, the details will depend on a number of factors. Today Rory and Amy discuss the cost of debt financing and try to pin down exactly what an average bridging loan would cost a property developer to make use of.
Bridging Loan Costs
Amy: Financing a property purchase. What would the charges be, involved, with something like that?
Rory: So, how long have you got and how long is a piece of string? The answer really is, with bridging, there isn't a set answer.
I think the first thing we need to - and this is not trying to be evasive. We need to, number one, understand, what's the problem?
Let's assume it is a bridging loan, it would be fair to say if you just take some simple concepts.
Number one, you'd normally get a net advance of about 60%, depending on the term of the loan. So, it's a 70% loan-to-value, you're buying a place for 100, the loan is 70% but actually, you receive 60%.
The term might be... You certainly wouldn't want to take a bridging loan for too short a term. The reason I would say that is, if it's too short a term and you had to extend it, you may go into penalty rates.
I have seen some very low rates. So, the example I gave you earlier, low loan-to-value, 0.5, 0.6 and up. That's for regulated and that's probably the lowest we've ever seen.
Typical bridging rates are probably about 1% per month. So, that's what I would always work on as my starting rate. The lender will normally charge a lender arrangement fee, probably 2% or thereabouts. There will most likely be a broker fee.
With development finance, there might be an exit fee but there shouldn't be on a bridge. And you'll have evaluation fees to pay, obviously because the property has to be valued. And you'll have the lender legals and your own legals.
So, they're roughly the costs, hence why we have to be really clear that the bridge is right. But we're working on around 1% or thereabouts.
We have funded projects ourselves, where we have not brokered and we've lent maybe 100% of the buy-price and 100% of the build. Those rates are not 1%. That would be by mutual agreement, where we understand the risk, the reward and that's really taking advantage of leverage.
I have a client who does 24 or 25 projects at any one go. So, he's prepared to pay a higher rate for access to the funds.
Amy: That makes sense. Thank you.