What should I ask?

You need to know the main aspects and possible terms of a bridging loan which are as follows:

• Upfront Fees
• Offer Fees
• Completion Fees
• Lenders legal fees
• Monthly Interest Rate
• Charge for Rolling Up Interest
• Minimum Term
• Daily Interest or monthly interest
• Maximum Loan to Value
• Valuation type - OMV or 90day?
• Exit Penalties
• Default terms and rates
• Broker Fees
• Cost of Valuation Fees

Wow, what a lot of fees there can be! It's funny, when we are asked for costings we divulge all fees but we have found many brokers and lenders that do not making their deal initially seem more attractive. Most people only think to ask of the arrangement fee and the interest rate and do not realise that there could be other fees. A good deal would mean there are no upfront fees except for the valuation fee (which should be at cost or near cost), a reasonable arrangement fee payable on completion only, no minimum term, daily interest and no exit penalties.

I would strongly suggest that you download our questionnaire by clicking here and then ask all of the questions relating to the above so that you can do a true like for like comparison. Below is a bit more detail on each of the above headings:

Upfront Fees - The only reason you should pay an upfront fee is if the bridging loan is being arranged as an insurance policy if it is a back up plan. For instance you may have a mortgage being arranged but you are unsure that it will be ready in time for a completion deadline. It would not be fair on the broker or lender to put a loan in place that is likely to not be needed

Offer Fees - Some lenders charge a fee after they have issued the formal offer. This is generally about £500 and is usually to protect the lenders legal costs in the event that you do not proceed with the loan. There are very few lenders that charge this fee but the majority that do are reputable lenders.

Completion Fee - Some lenders charge a completion fee and then have a fair interest rate and there are two lenders I know of that have no completion fee but you then pay a higher interest rate so you have to weigh up how long the loan is going to run for to determine the overall cost.

Lenders Legal Fees - This can be as little as £200 but as much as 1% of the loan. A long term mortgage a lender can spread the cost of this overhead over the term of the loan so you are rarely charged lenders legal fees, but a short term temporary mortgage may only run for a week or two so this cost cannot be absorbed.

Monthly Interest Rate - This amount can sound very expensive, even if it is with a high street bank. We get many people that hope to get a short term bridging loan at long term mortgage rates. A short term lender is only making money for a short term so it needs to make a greater profit. A long term mortgage can run for possibly 30 years so they make a very small amount but hopefully for a long term

Interest Roll Up - If you are borrowing a large amount of money it may not be feasible to service the monthly payments. A lender will generally then "roll up" say 6 months interest so you do not have to service the monthly payments. In principle you are borrowing the amount you need and 6 months interest but if you redeem the loan after say 3 months you will be refunded any interest not used.

Daily or Monthly Interest - If interest is charged daily you are purely charged on a day by day basis but usually given a monthly figure. Some lenders charge monthly so if the loan ran for say a month and a day you would be charged two months interest! Some lenders that charge monthly interest are reasonable and will be fair if you just go past a month.

Maximum Loan to Value - It is important to ask what the maximum loan to value is because if it is tight on loan to value and your property undervalues then you may not be able to borrow all you need or the loan could be void altogether.

Valuation Type - Most lenders will work off the open market value (OMV) whereas others work off a 90 day valuation. This means that if a property is in an area where the market is slow a surveyor will likely give a much lower valuation based on giving a value on the basis that if it was put on the market for a completion within 90 days. This again can lead to a loan being unable to complete as due to the lower valuation, it does not fit within the lenders loan to value criteria.

Exit Penalties - Some lenders may not charge a completion fee but will charge an exit penalty. Some will charge both but is important that this question is asked as some tuck this fee in the small print.

Default Terms and Rates - This is by far the biggest complaint we get about some lenders. It can be fair enough for a lender to have a slightly higher monthly interest rate if you have gone beyond the end of the term of the loan or are late making the monthly payment but some lenders have extortionate default rates. Be very aware of the default terms when arranging any form of bridging loan, especially an unregulated bridging loan.

Broker Fee - Sometimes it is fair and acceptable to charge a broker fee. The commission from the lender may not be enough to warrant the time the broker has committed arranging the loan. With some lenders the broker is expected to package the case and submit the application together with any necessary references and with others the sum total of the brokers work is providing a name and number which would be hard to warrant a broker fee. All lenders pay some form of commission to the broker as far as I am aware.

Valuation Fee - This should be provided at cost or near cost but beware some brokers and lenders that look to make anything to as much as £500 as an undisclosed admin fee. Ask if the lender or the broker is willing to disclose the actual cost and the admin fee.

Being aware of each aspect and term should see you get a competitive and fair deal. This does not however guarantee that you will have the funds in time which is where a broker can help to direct you to a lender that will live up to their promise of speed of completion.