If you know anything about bridging loans UK, you will know that they’re designed to ‘bridge the gap’ between buying a new home and selling your old one, or to give you the money needed for time-sensitive property purchases, such as auctions or renovations. These loans are quicker to get than many other loans, but you need to know how bridging loan interest works before you apply. Otherwise, you might find yourself repaying more than you planned.
How Interest is Charged On Bridging Loans
Bridging loans charge interest each month and rates are usually given as a monthly percentage. This is because bridging loans are only used for short periods, usually between a few weeks to a few years, and so charging annual interest doesn’t work. There are a variety of things taken into account by lenders when bridging loan interest is being calculated, including the amount of the loan, the interest rate that you’ve agreed, and the amount of time left on the loan.
Monthly vs. Rolled-Up Interest
One of the most important things to know is how the interest is paid.
- Monthly – You pay the interest every month and you still owe the same amount on the loan at the end of the term. This choice can lower the total cost of borrowing, but you need to have enough cash flow each month to cover the cost. Investors with rental income or businesses with steady income often use this route. Learn more about how much a bridging loan costs
- Rolled-Up Interest – The most common choice for bridging loans is rolled-up interest. (See more, rolled up and monthly interest compared) The interest is added to the loan balance instead of being paid monthly. The loan is paid off in full when it ends, which is usually when the property sells or is refinanced.
How to Calculate Interest On a Bridging Loan
It’s a lot easier to understand bridging loan interest if you have an example to work from. If you take out a bridging loan for £200,000 at 0.8% per month for six months.
Using the calculation of £200,000 × 0.8% = £1,600, you can determine that you’ll need to pay £1,600 in interest each month. You can then time this figure by the number of months the loan is for, which totals £9,600. At the end of the loan term, you will have paid back £209,600. This is because £200,000 and £9,600 equals £209,600.
Once you know how the monthly payments work and the difference between paying monthly interest and rolled-up interest, understanding the cost of bridging loans is a lot easier. When you’re choosing the right type of loan, the most important thing is to pick the option that works best with your cash flow and exit plan.
Need Help Navigating Bridging Loan Interest?
It’s a good idea to use a bridging loan calculator, as this will help you to figure out how much interest you can expect to pay. You can then factor in other costs – such as arrangement fees, legal fees and exit fees – to get an accurate idea of bridging loan fees and charges.
