Bridging loan pricing comes in all shapes and sizes, and there are several ingredients that make up the overall cost to the borrower. The cost of a bridging loan is a contentious issue at court, particularly when it comes to default interest rates.
Generally, bridging loans have the interest deferred. For example, if the loan is for £100,000 and interest is 1% per month (£1,000) and the loan is over 12 months, the amount received by the borrower is £88,000, and £100,000 is repayable at the end.
The level of per month interest is generally in the range of 0.75% to 2.00%. Where a loan sits within this range depends on a number of factors; these include the credit profile of the borrower, the loan to value (LTV) and the ease to gain possession of the security in it came to it.
Bridging loans also carry upfront arrangement fees (typically between 1% and 2%) and sometimes exit fees (e.g. 1% at maturity).
So, all of these add up. Bridging loans are an expensive form of finance because, for the lender, they are risky. The more risk, the higher the return the lender requires.
If things go wrong, lenders apply default interest. This is usually on top of the non-default per month rate of interest, or the per month rate of interest is replaced by the default rate. The default rate is often 3%. However, sometimes it is lower, sometimes higher. It is also, often, compounded, which hugely increases the actual default rate, and it gets higher and higher.
All of the above can become contentious, and court proceedings and claims are issued with regards to the pricing, and especially on the issue of default interest. At some point, legally, the default rate of interest becomes a ‘penalty’ in law. Quite where this is depends on the fact of the case. Anything above 3%, it has been argued in court, can comprise a penalty. There is case law on this, but it is case specific.
I have stood up in court to provide expert testimony and evidence on bridging loan pricing (as well as the regulation of bridging loans). I have represented both borrowers and lenders. My split is roughly 50-50 as it happens.
If you have a bridging loan problem, of any nature, and are looking for expert evidence, or advice, or a view on prospects, or a view on the regulations or pricing, please get in touch.