Short term lending always attracts higher rates of interest; just think about some of the APRs that you see in the world of unsecured pay day loans. It is not unusual to see rates at expressed at 2000% APR, and sometimes a lot more!
The same really applies to bridging loans but the big difference is that bridging loans are secured on an asset, usually a house, and thus do not need to be as silly as 2000%. But they are higher than normal mortgage rates because they are there to fulfil a special circumstance and short term need.
The bridging lender does not have the benefit of having the loan on the books for long, so can’t recoup costs and make a profit over the longer term. Nor does the Bridging finance lender benefit from the cross sales that the term lenders tend to benefit from.
Bridging lenders lend in circumstances where long term mortgage lenders would not, such as a property that has no kitchen or bathroom. The bridge might only last for a couple of months before the property would become eligible for a more normal mortgage.
When looking into using a bridging loan, just as important as considering the cost of the interest, it’s equally important to consider the cost of not doing what you are planning to do……the opportunity cost of not using a bridging loan.
So in the Kitchen and Bathroom example above, on a £250K property, with a £150K bridging loan, the cost might be 1% interest cost per month, 2% arrangement fee, (be careful some bridging lenders exit fees too) plus say another £1000 in legal fees and valuation costs. If the kitchen and bathroom installation costs are another 18K, then the total over 2 months would be £24,000. However by doing this work the value of the property may have been increased to £300K.
Yes they do cost, but a bridging loan can provide you with an opportunity which you might not otherwise have had to make money.