If you’re considering a bridging loan, understanding how the interest works could save you thousands of pounds.
While these short-term loans offer quick access to funds, their interest calculations can seem complex at first glance. You might wonder whether to pay monthly or roll up the interest, or how different lenders work out their charges.
Many borrowers find themselves surprised by the true cost of bridging finance simply because they didn’t fully grasp how the interest adds up.
We’ll look at how lenders calculate interest, what affects your rate, and which payment options might work best for your situation.
Bridging Loan Interest Basics
Bridging loans work differently from standard mortgages when it comes to interest.
While mortgage rates are quoted annually, bridging lenders express their rates monthly. This might seem like a small detail, but it makes a big difference to your costs.
Let’s say you’re borrowing £500,000.
With a monthly rate of 0.75%, you would be charged £3,750 in interest each month. Over a year, this adds up to £45,000 – much more than you might expect from looking at the monthly rate alone.
That’s why it’s so important to understand both monthly and annual equivalents when comparing options.
The amount you’ll pay depends on several things: how much you’re borrowing, what you’re using as security, and how long you need the loan for. Lenders look at these factors because bridging loans are short-term and they need to balance their risk against your needs.
For property developers and investors, these costs need careful consideration. You’ll want to factor them into your project calculations right from the start. A £1 million development might seem profitable on paper, but interest costs could soon eat into your margins if you don’t plan carefully.
Read more: Is a Bridging Loan More Expensive Than a Mortgage?
How Interest Charges Work
Bridging lenders structure their interest charges in three main ways.
Understanding these methods will help you know what to expect when applying for a loan.
Monthly payments
Monthly interest payments work like an interest-only mortgage – you’ll pay the interest charges each month to keep your loan balance steady.
Lenders will be happy with this option if you have regular income or rental payments to support the monthly costs. For example, if you’re an experienced landlord with a stable rental portfolio, your lender might offer monthly payments.
Rolled-up interest
With rolled-up interest, the lender adds the charges to your loan balance each month instead of requiring regular payments.
The amount you owe grows over time until you repay everything at the end of the term. For instance, if you borrow £300,000 at 0.75% monthly, after six months you’d owe £313,648. Lenders might offer this structure for property renovation projects where you won’t have income until the work’s complete.
Retained interest
Retained interest is where the lender deducts the expected interest upfront from your loan amount.
Say you need £300,000 for six months – the lender will approve a loan of £313,648 but only release £300,000 to you, keeping back £13,648 for interest.
This approach is common for development projects or when the lender wants extra security against missed payments.
Some situations call for mixed interest arrangements.
A lender might combine monthly payments with rolled-up interest if your income will change during the loan term. For example, if you’re converting a commercial property to residential, they might roll up interest during construction then switch to monthly payments once you have tenants in place.
Each structure has different implications for your cash flow and total borrowing costs. Your lender will assess your situation, including your exit strategy and income sources, to determine which method best suits your circumstances and their lending criteria.
You won’t always get the option to choose the interest method. Lender’s will determine what is available based on your loan circumstances.
Let’s talk bridging loans!
Factors That Shape Your Interest Rate
What you’ll pay for a bridging loan isn’t set in stone – several things influence your rate.
Loan to value
The biggest factor is your loan-to-value (LTV) ratio. Put simply, the more you borrow against your property’s value, the higher your rate might be.
A loan at 50% LTV will usually cost less than a similar one at 75%.
Legal charge
Bridging providers are extremely flexible lenders, they will lend to buy a property but they can also grant a loan in addition to your existing mortgage. This is known as a second charge bridging loan. It’s a bit riskier for the lender, so they will charge you a slightly higher rate, when compared to a first charge.
Property type
The type of property also matters. A standard residential house in London might get you a better rate than a commercial warehouse in a remote area.
Why? Because lenders see some properties as easier to sell if things go wrong.
Also, a refurb loan will cost you a bit more than a standard purchase loan. It’s all down to risk.
Exit plan
Your exit strategy will play a huge part.
Showing a clear, reliable way to repay, like a property sale or refinance, could help you secure better terms. Lenders love certainty (and planning), and they’ll often reward it with lower rates.
Additional Costs to Consider
Interest isn’t your only cost with a bridging loan.
You’ll need to budget for arrangement fees, which cover setting up the loan. These usually come to about 2% of what you’re borrowing. Legal fees come into play too – both yours and the lender’s – plus you’ll need to pay for a property valuation.
Some lenders charge exit fees when you repay the loan.
These might be a fixed amount or a percentage of the loan. Always check these details before signing up – they can make a big difference to your total costs.
Let’s put this in context.
On a £400,000 bridging loan, you might pay:
- Arrangement fee: £8,000
- Legal fees: £3,000
- Valuation: £1,500
- Exit fee: £4,000 (maybe)
That’s £16,500 in fees before you even look at the interest. Understanding these costs helps you plan better and avoid surprises.
Interest Payment Options Compared
Choosing how to pay your interest depends on your circumstances.
Monthly payments keep your loan balance down but need a regular income to support them. They work well for landlords who have rental income or businesses with steady cash flow.
Rolling up interest means less pressure on your monthly budget but a bigger payment at the end. Property developers often choose this option when renovating houses – they can focus on the project without worrying about monthly payments.
Retained interest can seem expensive as you’re borrowing more initially, but it gives you certainty about your costs. You know exactly what you’ll pay from day one.
How a Broker Helps with Interest Rates
A good broker brings real value when it comes to bridging loan interest.
They know which lenders offer the best rates for different situations and can often access deals you won’t find directly. They’ll look at your whole situation – not just the numbers on paper.
Brokers understand how lenders think.
They know what makes a strong application and how to present your case in the best light. This expertise often leads to better rates and terms.
They’ll also help you understand the real cost of different options. Sometimes what looks like the cheapest rate isn’t the best deal once you factor in all the fees and charges.
Next Steps
Now you understand how bridging loan interest works, you can make better decisions about your borrowing.
Think carefully about which payment option suits your circumstances and remember to factor in all the costs, not just the headline rate.
Getting professional advice makes sense when significant sums are involved. A broker can help you find the right lender and structure your loan in the most cost-effective way.
Remember, bridging loans are short-term solutions – having a solid exit strategy is just as important as getting a good interest rate. Take time to plan both your borrowing and your exit to make the most of this flexible funding option.
FAQ
Bridging loan interest is calculated monthly rather than annually. For example, a 0.75% monthly rate means you’ll pay 0.75% of your loan amount each month in interest.
With some lenders, yes.
This is known as serviced interest and it keeps your loan balance steady but requires regular payments from your income or rental revenue.
Rolled-up interest adds to your loan balance monthly, while retained interest is deducted upfront from your loan amount. Both are repaid when the loan ends.
Lower LTV ratios (borrowing less against the property value) usually mean better interest rates because they’re less risky for lenders.
Read more: How to Work Out your Loan to Value (LTV)
Standard residential properties often secure better rates than commercial or unusual properties because they’re easier for lenders to sell if needed.
Refurbishment loans will cost a bit more than standard loans for a purchase.
Bridging rates are higher than mortgage rates because they’re short-term and involve more risk for lenders.
While not required to get a loan, brokers often access better rates through their lender relationships and market knowledge. For example, Bridging Finance London has access to over 250 lenders.
Rates can often be agreed within 24-48 hours, with funds available in 1-2 weeks.
Yes, larger loans (£5,000,000+) can qualify for improved bespoke rates. Our minimum loan size is £150,000.
