Bridging Finance that is way too expensive! Isn't It?

It is a common fallacy that short term bridging finance costs too much. Well if truth be told, if used in the wrong circumstances that can be correct. Whatever goal, target or project you have before you, then selecting the right tool(s) for the job at hand is essential. As such, when raising finance against property, which is required for a short period only, then choosing the wrong loan option can cost you dearly!

The annual interest charges on property bridging loans can undoubtedly appear high when compared with an alternative medium term secured loan, but which alternative is actually the cheapest. There is no simple answer to cover all circumstances because the two finance options are not strictly comparable, they have different characteristics and the detail surrounding each application will differ. However, if we strip away and ignore some of those product specific characteristics, such as the time taken to secure a loan against property e.g. we assume both options can complete within the same timescale etc, then maybe you can make an informed choice as to which offers the best and lowest cost solution for you!

Now let us use some simple numbers to compare a short term loan with a medium term 5 year secured loan option, where a lender takes a second charge over the property offered as security. We'll assume the borrowing requirement is £100k and you have sufficient equity in a property that will allow you to take up any offer. We will also assume that you actually only need the finance for 6 months because you will have the cash to repay at that time, that the arrangement fees and associated set up costs are exactly the same. We can therefore ignore those costs and now just break down and compare the two "fixed interest rate" options on the amount borrowed and interest rates charged.

The 5 Year Secured Loan Option

• £100k fixed term "second charge" loan at 6% per annum.
• Monthly capital & interest repayments will therefore be £1933.28p.
• Total interest over the 5 year term will be £15,996.81p.
• Therefore you borrow £100k and repay in total £115,996.81p.

The Short Term Bridging Loan Option

• £100k short term "second charge" loan at a typical mid-price of 18% per annum.
• Monthly interest repayments will therefore be £1,500 (1.5% per month).
• Loan repaid exactly when you want to repay, i.e. 6 months.
• Total interest over the term will be 6 x £1,500 = £9,000.
• Therefore you borrow £100k and repay in total £109,000.

The Two Loan Options Compared!

In this example, the bridging loan in fact remains cheaper up to and including month 10. The total savings for a 6 month period would be £6,996.81p! The bridging loan monthly payment was £433.28p lower than the 5 year option. If the bridging loan was repaid earlier than month 6, then the overall savings would be even greater! In fact, there is more good news, at the time of writing the typical starting rates for medium term loans are between 7% & 8% per annum, the bridging rate used is more typical of a very high loan to value, they can start from as little as 9% per annum for a low geared loan. Note - It could well be that you could pay off a medium term after 6 months and pay any associated "early redemption penalties", in those circumstances the comparison could change either way, it all depends on the product choice at the time. Both products will have similar set-up charges such as valuations, solicitors costs and arrangement fees, but actual costs will vary between company's.

So remember, when it comes to short term lending, bridging finance could well be your best option, it's all about the detail and being clear about your actual needs!