The High Bridging Loan Costs to Look Out For, Where Extra Care Needs To Be Taken
This section outlines some of the more common unfair and questionable costs found in some unregulated bridging loan contracts. It explains the all-too-common renewal fees in some detail and includes a case study showing the type of renewal fees borrowers should avoid.
We have also provided some guidance for borrowers who already have a bridging loan running that has these contain high renewal fees in the contract.
Renewal Fees on Bridging Loans
Borrowers should be very careful with bridging loan agreements, which allow lenders to charge renewal fees in the event that the loan goes beyond its original term.
What is a renewal fee?
If a bridging loan goes over term, some lenders will charge a renewal fee to extend or continue the facility. This fee is usually calculated as a percentage of the original gross loan amount, and typically range from 1% to 6%, with renewal fees of 5% unfortunately being very common.
If the renewal fee is around 2%, this can, at a push, be seen as reasonable, because arranging a new bridging loan with another lender will often cost at least this much, if not more. However, the loan is already in place, the set-up costs have already been paid, so any renewal fee is really just an opportunity to take money from the borrower.
Please remember that some lenders do not charge renewal fees if their loan goes over term.
Renewal fees can also come with other problems.
Even though the loan has renewed, the lender may still stop allowing interest to roll up or be retained, and instead require the borrower to make monthly interest payments.
If the borrower wants those monthly payments added to the loan instead, that may be difficult or even impossible to arrange, especially if the loan-to-value is already high.
Where it can be arranged, this may often involve additional fees and costs.
The fact that the loan has gone over term usually means something has not gone to plan. Therefore, forcing the borrower to start making monthly payments at this point can make an already difficult situation even worse.
What borrowers really need to watch out for with renewal fees
The main dangers with renewal fees are:
- How high the fee is
- How often it can be charged
- How it is calculated
This is where some lenders become very opportunistic!
With around 1 in 4 bridging loans going over term, some lenders take advantage by charging very high renewal fees, commonly 5% of the original gross loan amount, or even more. They may then charge that fee every time the loan goes over term, until it is finally repaid.
In many cases, although the renewal fee is charged at the end of the loan term, it is not added to the loan account until redemption, so it may not be seen until a redemption statement has been requested.
This means the fee is usually non interest-bearing, but it also means it may not appear on monthly or annual statements, because technically it has not yet been charged or added to the outstanding balance. It can therefore often come as a nasty shock right at the end, when the borrower discovers that far more is owed than expected.
Some renewal fees are calculated on the original gross loan amount
This is one of the biggest shocks.
Most borrowers assume that if they have paid off a large part of the loan before the loan term ends, any renewal fee will be based on the remaining balance at the time of renewal.
Some lenders, especially those charging renewal fees of 5% or more, do not calculate it that way. Instead, they use the original gross loan amount, even if most of the loan has already been repaid.
For example:
- A borrower starts with a gross loan of £500,000 secured on a property that they are going to convert into 2 flats
- During the 12-month term, one flat is finished and sold for £400,000, reducing the loan balance to £100,000
- The second flat has not sold within the 12 months, so the loan goes over term with £100,000 still outstanding
- The lender charges a 5% renewal fee and also requires monthly interest payments to be made on the remaining balance
- A borrower might reasonably expect the 5% renewal fee to be £5,000, based on the £100,000 still outstanding.
- Instead, the lender charges 5% of the original £500,000, meaning the renewal fee is £25,000!
This is a huge difference, and many borrowers do not realise this until they request a redemption statement and discover that the amount they need to repay is far higher than expected.
By then, it is often too late to do much about it.
Property developers who repay their bridging loans in stages as their new properties sell need to be especially careful of these types of renewal fees.
Repeat renewal fees – they just keep on taking
Some lenders do not just charge one renewal fee. They structure the loan agreement so the facility can renew again and again, with another fee charged each time.
If the original loan term was 6 months, the facility may renew every 6 months, with a new renewal fee charged each time.
Unregulated bridging loans are often written for 12 to 18 months. In many cases, the renewal period is the same as the original term up to a maximum of 12 months. So if the loan was written for longer than 12 months, like 18 months, the lender may still charge a further renewal fee every 12 months, after the first renewal, therefore more frequently than the actual loan term.
This is why the renewal clauses need to be read very carefully, and borrowers should understand what this could mean for them.
A fee that looks painful, but manageable, the first time around, can become extremely expensive if the loan continues beyond term more than once.
Our view on high renewal fees
We do not like any size renewal fees, in our view, renewal fees of more than 2% are a particularly ugly practice.
The lender is already earning interest on the loan each month. If the loan continues beyond term, they continue earning interest for longer. In other words, the borrower is still a valuable customer.
In most cases, a borrower who goes over term is not trying to gain an advantage, something has simply not gone to plan. A sale has been delayed, a refinance has taken longer than expected, or a project has overrun.
To then use this situation as an opportunity to charge a very high additional fee is, in our opinion, unfair and opportunist of the lender.
This is especially hard to justify where the lender may only have charged around 2% to set the loan up in the first place, which was probably paid away by them as a commission payment, yet now, having benefited from interest charges spanning the full loan term, they want to charge a large fee, simply because the borrower has run out of time.
What to do if you have a bridging loan with exploitative renewal fees
If you already have a bridging loan facility that includes high renewal fees, the best thing to do is plan early and explore your various options before the renewal date arrives.
In many cases, arranging a re-bridge with another lender before the loan goes over term will help you avoid these charges. You may likely find that a new facility elsewhere is available on much better terms, especially if you have significantly reduced the loan balance on your current loan.
Please see our bridging loan calculator to compare what a new bridging loan could cost.
Perhaps the clearest example of some lenders opportunistic approach regarding renewal fees is when you try to leave
Where the opportunism quite often becomes obvious, is once the lender receives a redemption request and realise that you are looking to refinance elsewhere.
Then they may suddenly become much more flexible, so to keep the business they may offer to reduce the renewal fee. Remember the lender makes money for as long as the loan is active, they don’t want to lose this. Getting away with charging excessive renewal fees on top of keeping the loan is just the icing on the cake.
If you have not yet reached the renewal date, you are in a strong position. You can review your options, look at alternatives, and then approach your current lender to try to negotiate the fee away, or at least reduce it.
Unfortunately, if you have already passed the renewal date, your position is much weaker. At that point, the lender is likely to say the renewal fee is contractually due, and they will likely be far less willing to make concessions.
Make sure any reduced fees are agreed in writing
If your lender agrees to reduce or waive a renewal fee, or any other fee, make sure you get this confirmed in writing and check it carefully.
Do not rely on a verbal promise alone.
Even if the agreement comes from the most senior person at the lender, which it may well do, you should still insist on written confirmation and make sure the wording is clear.
Please also remember, there are plenty of good bridging lenders who do not exploit their customers in this way, so you are just better off avoiding the ones that do from the start.
Case Study of How Expensive Renewal Fees Can Be on a Together Bridging Loan
The following case study is based on a borrower account and complaint documents that we have reviewed.
A borrower took out an unregulated bridging loan with Together Commercial Finance Limited. The gross facility was just over £800,000. After fees and retained interest for 12 months were deducted, the net amount received by the borrower was approximately £718,000.
The loan was secured against two investment properties, which were intended to be the retirement fund for the borrower and his family. The borrower’s intended exit was the sale of the properties.
The loan went beyond its original 12 month term and a renewal fee of a little over £40,000 was in this case added to the loan balance. This was calculated as 5% of the original gross loan amount. The borrower was also required to start making monthly interest payments, that were over £6,000 per month.
A few months later, the borrower sold one of the properties and repaid approximately £615,000, reducing the balance to around £237,000. The borrower then continued making monthly interest payments of around £2,000 per month for the next 4 years.
Five years since taking out the original loan, the borrower requested a redemption figure, where he discovered that further renewal fees had been applied. Those fees were again calculated with reference to the original gross facility, not the much lower balance that remained after the partial repayment 4 years earlier.
The result was that total renewal fees, including the first one that was added to the loan balance, came to a little over £200,000. The redemption figure was not the £237,000 or so that they had been expecting, it was £397,000!
The borrower had been aware of the first renewal fee, which had already been added to the loan balance. However, they were shocked by the other four renewal fees that had also been charged.
The borrower complained to the lender. In their Final Response, that we have reviewed, Together Commercial Finance did not uphold the complaint and stated that, under the terms of the agreement, renewal fees were charged at 5% of the original gross loan amount. They also informed the borrower that a further renewal fee would be added at the next renewal date unless it has been redeemed.
We do not believe that such customer treatment is in line with Together’s marketing and PR, where they repeatedly claim to put their customers first!
Default Fees
Default fees can also be very expensive!
If the loan goes into default you may be charged default fees. These will vary from lender to lender and also different agreements from the same lender.
Take note of any default fees written into loan agreements. These can be a one-off fee if the loan defaults, a monthly charge for as long as the loan is still active, or a combination of both.
They could also be a fixed default fee, or one that is a percentage of the gross loan amount.
Before taking out a bridging loan, borrowers maybe fully aware of the default fees, but confident that they are not going to default on the loan.
However, it is important to also remember that defaulting on a loan is not limited to going over term and not repaying it on time. If you break any other terms of the agreement, you could also be defaulting.
A typical one for bridging is that you may have been required in the conditions of the loan to have the security property on the market by a certain date. If the property is not on the market by this date, or is withdrawn from the market after this date, then the loan could be placed in default.
It is important to be aware of the terms and conditions, so that you do not break them.
Other common instances that could lead to default are:
- Property insurance not being in place, or expiring
- Property being rented out without a suitable tenancy agreement
- For unregulated agreements, the borrower residing at the security property is not allowed and would result in default
Concessionary Interest Rates
This is an interest rate that is reduced for as long as a loan remains out of default. However, should the loan default then the reduced rate disappears and the contractual rate takes effect.
Care should be taken with these as there is usually a significant difference between the two rates, and it also could be quite easy to find that the loan has gone into default.
These excessive fees are normally only found on unregulated bridging agreements, out of the jurisdiction of the Financial Conduct Authority.
How do some lenders justify these high fees
Lenders sometimes justify these high fees and penalties by describing them as being a firm incentive for borrowers to ensure that loans are repaid on time and do not go into default.
The truth is lenders make huge profits from them, and they can literally take all the profits from a project, sometimes the assets also, from the borrowers who trusted them!
