Bridging Finance: The True Cost Model Most Borrowers Never See

What bridging finance is

Bridging finance is a short-term secured lending product, typically used to bridge a gap between a property purchase and longer-term finance — most commonly when speed of completion is required, when the property is unmortgageable in its current state, or when a borrower needs to complete a purchase before the sale of an existing property.

Bridging loans are secured against property, typically at loan-to-value ratios of up to 75% of open market value or 70% of the purchase price, whichever is lower. Terms typically run from one month to 24 months, with interest either serviced monthly or rolled up and repaid at exit. The headline interest rates advertised by lenders — typically expressed as a monthly rate — are the starting point of cost analysis, not the end point.

The full cost components

A complete bridging finance cost model must include the arrangement fee — typically 1.5-2% of the loan amount, deducted from the advance; monthly interest on the gross loan amount including rolled-up interest if applicable; a valuation fee charged by the lender's appointed surveyor, typically £500-£1,500 for residential property; legal fees for both the lender's solicitor and your own solicitor, with lender legal fees typically £800-£1,500; an exit fee on some products, typically 1% of the loan amount; and broker fees if the loan was arranged through an intermediary, typically 1% of the loan.

On a £500,000 bridging loan at 0.85% per month over 9 months with rolled-up interest, the total cost including a 2% arrangement fee and typical legal and valuation costs can exceed £55,000 — significantly more than the headline rate calculation of £38,250 in monthly interest would suggest.

How interest compounds on rolled-up facilities

When interest is rolled up rather than serviced monthly, it is added to the loan balance each month and itself attracts interest in subsequent months. This compounding effect means that the effective interest rate on a rolled-up facility is higher than the stated monthly rate, and increases with the loan term.

On a £500,000 loan at 0.85% per month with rolled-up interest, the outstanding balance at month 9 is approximately £540,000 — not the £538,250 that a simple calculation of 9 × 0.85% × £500,000 would suggest. Over longer terms, this difference becomes material. Lenders are required to quote an Annual Percentage Rate (APR) but this calculation often excludes fees, making direct comparison on APR alone unreliable.

How to compare lenders properly

The only reliable basis for comparison is the total cost of the facility over your anticipated term, including all fees. Request a full illustration from each lender showing: the net advance after fee deduction, the monthly interest calculation methodology, the outstanding balance at each month end if interest is rolled up, all associated fees itemised, and the total amount required to redeem the facility at your anticipated exit date.

Lenders with lower headline rates sometimes charge higher arrangement and exit fees that make their total cost higher. Lenders with no exit fee often have higher monthly rates. The only number that matters for comparison purposes is total cost to exit on your anticipated timeline.

Exit strategies and timing

Bridging finance is designed to be repaid quickly — typically through a refinance onto a longer-term mortgage, through the sale of the property, or through the completion of a planned sale of another asset. The exit strategy must be credible, documented, and realistic before the loan is taken.

If the exit strategy fails — the refinance is delayed, the sale falls through, the development takes longer than planned — the borrower faces either extending the facility at additional cost, or in the worst case, the lender appointing a receiver. Stress-testing the exit strategy against a 3-6 month delay is essential planning. The cost of an extension is typically 1-2% of the loan amount plus continuing interest, added to an already expensive position.