There are a lot of different bridging loans UK out there, and you’ll have a few decisions to make when you’re choosing one. But, one of the most important choices is how to pay the interest. Interest is to be expected, but that doesn’t mean all bridging loan interest works in the same way.
Bridging lenders usually offer two main types of interest; rolled-up interest and monthly interest.
Even though both options use the same base interest rate, they affect cash flow, repayments and the total cost of borrowing in different ways.
Rolled-Up vs. Monthly: What’s the Difference?
With monthly interest, you pay the interest on the loan every month for the whole time you have it. The amount of the loan stays the same the whole time and, at the end, you only pay back the original loan amount. This is because you’ve already paid off the interest. This approach works well for people who get regular payments, such as landlords with rental income to cover the cost. However, you do need to make regular monthly payments. This means it’s not always the right approach for people who have a lot of assets, but not a lot of cash. If you would like more information about how much a bridging loan costs
If you have rolled-up interest, you don’t have to make monthly interest payments. The interest is instead calculated once a month and added to the loan. At the end of the term, everything is paid back. There are no payments every month, and interest builds up over time. When the loan comes to an end, you pay back the full amount. This is the most common way to set up bridging loans, especially if you plan to pay back the loan with money from selling at the end.
The Impact of Rolled-Up and Monthly Interest
The main difference between rolled-up and monthly interest is when you pay. Monthly interest spreads the cost over the entire life of the loan, which means your final payment is lower. But, rolled-up interest puts off all monthly payments, but it makes the amount owed at the end bigger. You can use the bridging loan calculator to see how each option affects your total repayment.
Bridging Loan Interest in Action
If you wanted to borrow £150,000 for a period of 8 months, and the interest was being charged at 0.75%, you would pay back £1,125 each month. Over the course of 8 months, you will have paid £9,000 in interest. Your final payment would then be £150,000 because you have already paid off the interest. With rolled-up interest, you won’t have paid anything back each month, and so your final payment will be £159,000. This is because you have to pay back the original loan amount, plus £9,000 of interest. The interest rate is the same, but the timing of payments and the final balance are very different.
Which is Right for You?
If you want to keep your monthly expenses as low as possible, and you have an exit strategy you can count on, rolled-up interest is likely to be the best option. If you have enough cash flow, monthly interest can lower your overall risk and keep your exit costs low. By using the bridging loan calculator, you can then compare the repayment amounts side by side.
