Often times people will get confused about what exactly constitutes a bridge loan and what are the types of rates and fees they can expect.
The challenging part about providing a definition is that while the basic description of a bridge financing arrangement is fairly universal, there can be considerable differences in the rates and terms of different forms of bridge capital ranging from secured to unsecured forms.
A bridge loan is typically a loan that will not be outstanding for more than one year.
It will have a defined beginning and ending time, the application of funds will be clearly understood as well as the specific events or actions that will repay the loan at the required time.
Funding is required to meet a short term capital requirement and resulting debt used to meet this requirement will be paid rather quickly in most cases from a defined source of capital which may be in the form of cash or a longer term debt or equity financing arrangement.
With respect to the bridge financing options we provide, they are all in the form of property financing backed by mortgage security.
This form of bridge capital can be in first, second, or even third mortgage position, depending on the property and the amount of equity that exists to cover off the cash requirement and is typically provided by a private money lender or investor.
Interest rates for a first position bridge loan will tend to fall in the 7% to 12% range, a second in the 10% to 15% range, and thirds will see rates that trend still higher due to the relative risk associated with a higher or deeper subordination position.
The cost of capital will also tend to include lender and broker fees which are usually calculated as a percentage of the loan amount, but can also be stated as a fixed amount. The lender and broker fees are paid at the time of closing from the loan proceeds.
The faster the bridge loan needs to be put into place, the higher the interest rate, lender, and broker fees will likely be as there are a limited number of lenders that can respond to a bridge financing request that needs to be completed in a number of days which is extremely fast for mortgage financing or any form of registered bridge capital for that matter.
And while we say that the loan term will be less than one year, in many cases the time period is significantly less than a year even though the mortgage term may be set at one year.
In situations where we know that the mortgage is unlikely to go to term, there can be several different prepayment options available to the borrower, depending on the lending and funding criteria of any particular lender.
Repayment options can range from fully open with no prepayment penalty to three months interest and many different options in between.
The key to remember with the cost of bridge capital is the comparison with value of the opportunity gained or the cost avoided.
A comparison with say a bank loan will show that a bridge loan as described above is more expensive. But that is also an apples and oranges comparison as banks are not prepared to even entertain many short term bridging requests.
There is a cost of flexibility and speed which most bridge funding facilities provide. And if the cost is less than the value of the benefit, then its certainly something to be considered.
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