Purchasing a property in the UK is like going on a voyage amid a thunderstorm. You must go against a tide but keep yourself intact with your route.
As the market is pumped up with immense competition, it’s hard to clear your head of intense blabbering.
Bridging loans come as the first port of call for instant property purchase. But, still, it’s marred with a lot of information. That information is too confusing to make sense.
Many borrowers like you question how they can calculate their bridging loan value.
Don’t worry. We will debunk the myths and let you know the real information about residential bridging finance.
Let’s delve deep into the article.
What are bridging loans?
A fast and efficient financial product that helps you bridge the financial gap to get the desired money. That’s what we call bridging finance.
It’s a secured loan type, which requires an asset, property in this case, to get a loan.
The lender keeps your asset as security, guaranteeing you will repay the loan. However, many consider it a risky loan type for its short repayment time than other options.
Therefore, the fear of defaulting on payments haunts you and your lender like a spectre. On the flip side, the number of people wanting residential bridging finance has increased.
That’s because they find it easy to get a flexible loan in a limited time. When it comes to payment disbursement, these loans stand out.
You can get a quick bridging loan in 3,4 days. However, the time is not unlikely to vary to 1 month or two months.
Once you get the amount required, you can allocate it to your projects instantly. The important thing is you need to arrange the repayments as soon as possible.
Bridging loan providers seek the repayments in a year or more. Since one or two years isn’t much time, people also call them short-term bridging loans.
You can get them from private lenders, some high-street lenders, and P2P lending platforms.
What are the costs involved?
If you are expecting it to be a cheap financial product, then there is a red caution for you asking you to stop.
It’s an expensive option than mortgages. The primary thing that makes it costly is its interest rates.
Ranging between 0.5 to 1% or maybe more, the monthly interest rates takes the lead from mortgages.
That said, every lending company have their interest rates on their websites. So you can check them out to have an idea.
Want to find the interest rates? It’s simple maths. Let’s say you find a loan provider charging an interest rate of 0.5% on £100,000.
The monthly interest becomes £500. However, here is the real catch! Most people think their interest will be added monthly and must pay the total.
However, that’s not the case. Your interest is charged on the outstanding monthly amount and compounded after each month.
So, the total interest rate is much more than you think you should pay. It’s just like an aeroplane that changes its path 1 degree.
You may think that it reaches its destination because, after all, it’s just a single-degree change.
However, as the plane flies over time, it diverts from its target at one mile per every 60 miles of travel. That’s how your interest gets multiplied exponentially with time.
The loan to property-value ratio is the second thing that helps you calculate the loan cost.
Simply put, it’s the chunk of your total secured property value you are given as a bridging loan.
LTV ratio affects your interest rate and also the total loan redemption amount.
For example, suppose your LTV ratio is 75%. It means you will be given the 75% of your total property value.
In this case, consider the property value as £100,000. Now the loan amount becomes £75,000.
Greater the LTV ratio, the larger the interest rate and, in turn, the total loan repayment.
You can also calculate max-cashed out amount as:
£100,000 x 0.75 (LTV) = £75,000
What’s more? There are other costs, and sometimes they become a big chunk of the total costs. These costs include lending fees ranging from 1% to 2%.
You may also need to pay administrative fees and survey fees. Not only that, but you also have to pay the exit fees.
In total, it becomes a hefty amount. So it’s better to keep all of these fees in mind to keep the wheel turning in the right direction.
How to calculate all these fees?
On the face of it, bridging loans look a property bridging loans seem simple. Notwithstanding, there is a lot more that goes into it.
Getting into the nitty-gritty is not that hard, but some may find it confusing.
Therefore, you can get a bridging loan calculator on the internet. It’s a simple calculator tool that asks you to provide the necessary information.
After that, it calculates the loan amount in a matter of seconds.
If you want to use the old school method, you can calculate total costs by adding interest rate and all other costs with respect to time.
After deciding to get a bridging loan, the feisty hurdle that comes your way is the cost. Most people don’t know the real costs involved in this venture.
That’s why they end up messing up their exit strategy. You may fail to repay if you can’t address the total cost question.
It causes your loan provider to foreclose on your property because they lose their money. We have provided valuable information in this article to address these issues.