What a bridging loan really costs: reading beyond the monthly rate

Bridging loans are usually quoted as a monthly interest rate, and it is natural to compare on that figure alone. But the monthly rate is only part of what you pay. Fees, the way interest is charged and the cost of any delay all feed into the total, and the cheapest-looking rate is not always the cheapest loan.

Interest: rolled up, serviced or retained

Interest on a bridge can be handled in different ways. Rolled-up interest is added to the loan and repaid with the capital at the end. Serviced interest is paid monthly. Retained interest is deducted from the loan at the outset, which reduces the cash you receive. Each suits a different cash-flow position, so ask which applies and what the net advance will be.

Fees to look for

Most bridging loans carry an arrangement fee, typically a percentage of the loan. On top of that you can expect a valuation fee, legal costs for both sides and sometimes an exit or administration fee. Ask for every one of these in writing and check whether they are paid up front or added to the loan, because added fees also attract interest.

An illustrative example

Assume a net advance of £300,000 for twelve months, with the property sold after nine. Assume an arrangement fee of 2%, interest of 0.9% a month rolled up for nine months, £1,500 for the valuation and £2,500 for legal costs. These are assumptions for the example only, not a quote.

The arrangement fee is £6,000 and the interest is £24,300, so the total cost is £34,300 including the valuation and legal costs. That is about 11.4% of the amount borrowed, over nine months. The interest is the largest part, but the fees make up more than a quarter of the total.

Why timing matters

Interest runs for as long as the loan does. If the exit takes longer than planned, the cost rises each month, and a loan that overruns its term can attract default interest. Building a margin into the timetable is cheaper than relying on the best case.

Questions to ask

Ask for the total cost of the loan over your expected term and over a longer one. Ask whether there are early repayment charges and what happens if you repay sooner than planned. Comparing offers on total cost, not the headline rate, shows the real difference between them.