How Does the Total Cost of a Revolving Credit Facility Compare to Bridging Finance over 12 Months?

How Does the Total Cost of a Revolving Credit Facility Compare to Bridging Finance over 12 Months?

For UK buy-to-let (BTL) landlords and property investors, securing flexible capital is essential for growing a portfolio. Whether you are funding property refurbishments, purchasing a home at an auction, upgrading a property to meet energy performance certificate (EPC) targets, or bridging the gap during a remortgage, the financial product you choose directly impacts your bottom line. Two of the most popular short-term funding options are bridging finance and a secured BTL revolving credit facility.

When looking at a 12-month horizon, the total cost of borrowing can vary dramatically between these two options. Understanding how interest, setup fees, and repayment structures work will help you make an informed decision for your property investment business. Promise Money, an authorised broker regulated by the Financial Conduct Authority (FCA) under registration number 681423, can help you compare these products to find the right fit for your circumstances.

The True Cost of Bridging Finance Over 12 Months

Bridging finance is a traditional tool used by property investors to buy or refurbish properties quickly. It is typically a short-term, first or second-charge loan. To understand the total cost, you must look closely at how interest is charged and how these loans are structured.

Bridging loans generally fall into two categories:

• Closed bridging loans: These have a fixed repayment date, usually backed by a guaranteed exit strategy, such as a completed property sale or an approved remortgage.
• Open bridging loans: These have no fixed repayment date but typically must be repaid within 12 to 24 months. Because they carry more uncertainty, they may come with higher interest rates.

A key characteristic of bridging finance is that most bridging loans roll up interest. This means you do not make monthly payments. Instead, the interest accumulates and is paid back in a lump sum at the end of the term. While this helps with monthly cash flow, interest compounds over time, which can significantly increase the total amount you owe by month 12.

Furthermore, bridging loans charge interest on the entire facility limit from day one. If you borrow £100,000 for a refurbishment project, you pay interest on the full £100,000 for the entire 12 months, even if you only need to spend £25,000 in the first few months. Additionally, bridging loans often have minimum interest periods, meaning you might pay for three months of interest even if you repay the loan in four weeks.

The Mechanics of a Secured BTL Revolving Credit Facility

A secured BTL revolving credit facility acts like a property overdraft. It is a secured second-charge facility that sits behind your existing first-charge buy-to-let mortgage. Once arranged, you can draw down funds, repay them, and draw them down again as needed, without the need to submit a new application every time.

The primary advantage of this secured facility is that interest is only charged on the drawn amounts, not on the total facility limit. If you have a £100,000 facility but only draw £25,000 for an EPC upgrade, you only pay interest on that £25,000. When you repay that balance, your interest charges drop back to zero, though the facility remains open and ready for use.

Once the initial facility is set up, funds can typically be drawn down in 24 to 48 hours. This makes it highly efficient for ongoing refurbishment costs, covering void periods, or placing auction deposits on short notice.

A Direct 12-Month Cost Comparison Scenario

To see how the total costs compare, let us look at a realistic scenario for a property investor over a 12-month period.

Imagine you have a facility of £100,000. You need £30,000 for the first three months to complete a light refurbishment. You then repay this. For the next three months, you do not need any funds. In month seven, you draw down £50,000 to use as a deposit on an auction property, which you repay at month twelve when you remortgage.

The Bridging Finance Route

If you used a bridging loan, you would typically need to take out a £100,000 loan at the start. You would pay interest on the full £100,000 for the entire 12 months. Alternatively, you might take out two separate bridging loans. However, doing so would require you to pay arrangement fees, valuation fees, and legal fees twice. This dual-setup process can easily add thousands of pounds to your total borrowing costs.

The Secured Revolving Credit Route

With a secured BTL revolving credit facility, you set up the facility once, paying one set of arrangement and legal fees. Over the 12 months, your interest charges would look like this:

• Months 1 to 3: You pay interest only on the active £30,000 balance.
• Months 4 to 6: You pay zero interest because your drawn balance is zero.
• Months 7 to 12: You pay interest only on the active £50,000 balance.

In this scenario, the revolving credit facility is highly likely to cost substantially less in total interest and fees than a 12-month bridging loan. The flexibility of only paying for what you use prevents you from paying for “idle” cash.

Comparing Setup Fees and Additional Costs

When comparing total costs, you must also look beyond the interest rate. Both products carry administrative costs that impact the overall expense.

Bridging loans often come with setup costs, which may include:

• An arrangement fee (typically 1% to 2% of the loan amount).
• An exit fee (though many modern lenders do not charge this, some still do).
• Valuation fees to assess the property value.
• Legal fees for both your solicitor and the lender’s solicitor.

A secured BTL revolving credit facility also incurs setup costs, such as legal and registration fees, because it is registered as a second charge against your residential buy-to-let property. However, because you only set it up once, you avoid the recurring fees associated with taking out multiple short-term bridging loans for consecutive projects throughout the year.

Understanding the Risks and Protecting Your Credit Profile

Both bridging finance and revolving credit facilities are secured against your property. This means you must consider the risks carefully before borrowing. Your property may be at risk if repayments are not made. If you default on your agreement, it could lead to legal action, repossession, increased interest rates, and additional charges from the lender.

Before applying for any secured facility, it is wise to review your credit profile to understand how lenders view your financial history. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

While a single missed payment does not instantly result in repossession, it can lead to default notices on your credit file, which may limit your ability to secure competitive remortgage rates or additional property finance in the future.

Is a Revolving Credit Facility Right for Your Portfolio?

A secured revolving credit facility is generally best suited for active landlords who manage multiple projects, experience seasonal void periods, or regularly buy properties at auction. It offers the speed of bridging finance but with greater flexibility and lower potential costs over 12 months, provided you do not need the full facility limit for the entire duration.

If you need advice on which option suits your specific investment strategy, Promise Money can help you compare available products. You can contact their team on 01902 585020 or visit their dedicated hub at promisemoney.co.uk/landlord-revolving-credit-100 to explore your options.

People also asked

Is a revolving credit facility secured or unsecured?

The BTL revolving credit facility offered by Promise Money is a secured facility, meaning it is registered as a second charge against your residential buy-to-let property. It is not an unsecured business loan or a credit card.

How quickly can I draw down funds from a revolving credit facility once it is set up?

Once the facility has been fully arranged and registered, you can typically draw down funds within 24 to 48 hours, providing rapid access to cash for property purchases or emergency repairs.

Can I use a revolving credit facility to pay off an existing bridging loan?

Yes, you could potentially use the drawn funds from a secured revolving credit facility to pay off a bridging loan, which may help you avoid high compounding interest rates or exit penalties.

What is the main advantage of revolving credit over a traditional bridging loan?

The main advantage is flexibility; you only pay interest on the money you actually draw down, whereas a bridging loan charges interest on the entire loan amount from the day the agreement starts.

Does Promise Money lend the money directly?

No, Promise Money is an FCA-authorised broker (Ref: 681423), not a direct lender. They work with a panel of lenders to find and arrange the most appropriate secured finance products for your needs.