Bridging finance, also known as a bridge loan, is a short-term financing option designed to "bridge the gap" between the sale of an existing property and the purchase of a new one, or to cover immediate financial needs before longer-term funding is secured. It's a flexible but often more expensive form of credit compared to traditional mortgages.
How Bridging Finance Works
Typically, a bridging loan is secured against property. This could be your current home, the property you intend to buy, or another asset. The loan term is usually short, ranging from a few weeks to 12 months, though some can extend up to 24 months. The funds can be used for various purposes, including:
Purchasing a new property before selling your current one.
Renovating a property to increase its value before resale.
Meeting a tight deadline for a property purchase.
Securing a property at auction.
Covering unexpected expenses or cash flow gaps.
Key Costs and Considerations
Bridging finance comes with several costs beyond the principal loan amount. It's crucial to understand these to accurately assess the total expense:
Loan Amount: The principal sum borrowed.
Interest Rate: Bridging loans typically have higher interest rates than standard mortgages, often expressed as a monthly or annual percentage.
Loan Term: The duration for which the loan is taken out, usually measured in months.
Arrangement Fee: An upfront fee charged by the lender for setting up the loan, usually a percentage of the loan amount.
Valuation Fee: A fee to cover the cost of valuing the security property.
Legal Fees: Costs associated with the legal work required to set up and manage the loan.
Exit Fees: Some lenders may charge a fee when the loan is repaid. (Note: This calculator does not include exit fees for simplicity).
The Calculation Explained
Our Bridging Finance Calculator helps you estimate the total cost of your bridge loan. The calculation involves several components:
Interest Calculation: The total interest paid over the loan term is calculated. The formula used is:
Total Interest = (Loan Amount * (Annual Interest Rate / 100)) * Loan Term (in Years) Since the term is in months, we convert it:
Total Interest = Loan Amount * (Annual Interest Rate / 100) * (Loan Term Months / 12)
Arrangement Fee: This is calculated as a percentage of the loan amount:
Arrangement Fee Cost = Loan Amount * (Arrangement Fee Percentage / 100)
Valuation Fee & Legal Fees: These are fixed costs added directly to the total.
Total Estimated Cost: The sum of the Loan Amount, Total Interest, Arrangement Fee, Valuation Fee, and Legal Fees.
Total Cost = Loan Amount + Total Interest + Arrangement Fee Cost + Valuation Fee + Legal Fees