What a bridging loan is and who uses one
A bridging loan is a short-term loan secured against property. Terms typically run from 1 to 24 months, although this calculator accepts up to 36 so you can see what a longer term would cost. As the name suggests, it bridges a gap: the loan is taken out for a specific purpose and repaid from a known source, usually the sale of a property or a longer-term mortgage.
Landlords tend to use bridging when a normal buy to let mortgage cannot be arranged in time, or when the property cannot get one yet. Examples include buying at auction, where the deadline to complete can be short, buying a property that needs work before a mortgage lender will accept it, and buying a new property before the sale of another has gone through.
Interest on a bridging loan is usually rolled up or retained rather than paid monthly. Rolled-up interest is added to the balance each month and paid in full when the loan is repaid. Retained interest is held back from the loan at the start to cover an agreed number of months. Either way, you normally make no monthly payments and the cost lands at the end. That is why the calculator shows an average monthly cost and a total repayable, rather than a monthly payment.
How loan to value sets the rate
Loan to value, or LTV, is the loan divided by the value of the property or properties offered as security. A £200,000 loan against a £500,000 property is an LTV of 40%. The lower the LTV, the more equity sits behind the loan, and the lower the rate tends to be.
The calculator uses a table of indicative monthly rates supplied by Pure Property Finance, set out in five LTV brackets: 55%, 60%, 65%, 70% and 75%. Each bracket has five rates, from lowest to highest, because the rate on offer depends on more than LTV alone. The rates step up from one bracket to the next, so a loan in the 55% bracket starts at a lower rate than one in the 75% bracket, and the same is true at every point in the range.
Your LTV is matched to the nearest bracket. Anything below 55% uses the 55% bracket, and anything above 75% uses the 75% bracket. If your LTV sits exactly halfway between two brackets, the lower one is used. The bracket applied is shown in the assumptions above the results, so you can see which rates were used. If your LTV is close to the line between two brackets, try a slightly smaller loan to see whether it moves down. Lenders set their own maximum LTV, so a result above 75% is not a sign that a lender will lend at that level.
How the costs add up
The gross borrowing is the starting point. The calculator adds two fees to the loan you enter: an arrangement fee of 2% of the loan and legal fees of £1,500. On a £200,000 loan that is an arrangement fee of £4,000, giving gross borrowing of £205,500. Both fees are assumptions, and the fees on a real application may be different.
Interest is then rolled up on the gross borrowing. Each month's interest is added to the balance, and the next month's interest is charged on the new, larger balance. Over 12 months at a monthly rate of 0.55%, £205,500 grows to £219,480.90. The interest is £13,980.90, and the average monthly cost is £1,165.07.
The longer the term, the more the compounding adds, because interest is charged on interest for more months. Repaying sooner usually means less interest, but check whether the loan has a minimum interest period before you plan around an early exit.
Some lenders also charge an exit fee when the loan is repaid. This calculator does not include exit fees. If a lender charges one, add it to the total repayable to see the full cost, and ask for a full list of fees before you commit.
Using more than one property as security
The value box asks for the value of all properties offered as security, not only the one you are buying. If you own other property with equity in it, a lender may agree to take a charge over that property as well. Securing one loan against more than one property in this way is known as cross charging.
Adding security lowers the LTV. A £200,000 loan against a single £250,000 property is an LTV of 80%, which the calculator places in the 75% bracket. Offer a second £250,000 property alongside it and the combined value is £500,000, an LTV of 40%, which uses the 55% bracket and its lower rates. If a property already has a mortgage, a lender is likely to look at the equity left in it rather than its full value, so enter a figure that reflects that.
The trade-off is risk. Every property offered as security is at risk if the loan is not repaid, not only the one the loan was for. A lower rate can mean putting much more of your portfolio on the line. Weigh the saving against that, and think about how you would repay if the exit took longer than planned.
Who should not use bridging
Bridging only works with a clear exit: a sale, a refinance onto a term mortgage, or another source of funds that will repay the loan on time. Without one, rolled-up interest keeps growing and the loan gets harder to clear the longer it runs. If you cannot say how and when the loan will be repaid, bridging is not the right choice.
Bridging is also the wrong tool when a term mortgage would do. If you are buying a property that a buy to let lender will accept, with no deadline that rules out a normal mortgage, a term mortgage will usually cost less over the time you hold the property. Bridging rates are quoted monthly, and compounding over a year adds up quickly. Our buy to let mortgage calculator shows the monthly payment and rental cover on a term mortgage, so you can compare the two.
If the plan is to refinance, check that the property will meet a term lender's criteria once any work is done, and that the rent will support the new loan. Allow time for delays in the work, the valuation and the application, and run the calculator with a longer term to see what an overrun would cost.