Although many people are familiar with the interest rates associated with conventional mortgages, the workings of bridging loans can differ greatly.
Bridge loans are a great way to finance real estate in the short term, and they are frequently best suited to situations that call for speed and flexibility.
However, there may be some confusion regarding how bridging interest rates are determined, charged, and paid, as well as the best course of action for locating favorable rates and the ideal lender for your situation.
The final amount you pay is influenced by a variety of factors in addition to the fact that interest rates are primarily set by lenders. There is more flexibility in how you repay the loan's interest than there is with traditional borrowing.
To ensure that you are well-informed before taking out a bridging loan, below is a straightforward guide that covers the key aspects of bridging loan interest rates. It is essential to have a clear understanding of these elements to make an informed decision.
Are Bridging Loan Rates Higher Than Traditional Mortgage Rates
How Much Are Bridging Loan Rates?
When taking out a bridging loan, the interest rates usually range from 0.45% to 2% per month.
The specific rate offered to you will depend on various factors, such as:
The property type you are purchasing
Your exit strategy (e.g refinancing or selling a property)
The urgency of your financial needs
Any construction work involved, your loan-to-value ratio
The lender you choose.
How Do Bridging Loan Interest Rates Work?
In essence, the way interest rates function in bridging loans is quite similar to that of regular borrowing such as a typical mortgage. The lender sets the interest rate and it is usually paid every month in addition to repaying the loan.
The major difference, however, is that the interest rate for bridging loans is quoted on a monthly basis, unlike in a standard mortgage where it is quoted annually as APR. This is because bridging loans are short-term in nature.
Bridge loans come with a short repayment period, usually within 12 months, and this makes the interest rates comparatively higher. Nonetheless, many bridging loan providers only charge interest on the months that the loan is outstanding, without any early repayment fees.
This means that if the loan is repaid earlier than the agreed period, the borrower only has to pay interest for the time the loan was outstanding. Some lenders even calculate interest on a daily basis, so if the loan is repaid halfway through a month, the borrower is only charged interest for the days they had the loan outstanding in that month. Therefore, when considering bridging loan quotes, this factor should be taken into account as it can considerably reduce the overall cost of the loan.
How Are Bridging Loan Interest Rates Calculated
When it comes to bridging loans, the interest rates are typically calculated on a monthly basis, unlike mortgages which are calculated annually.
The interest rates are determined based on various factors such as
The amount of money borrowed,
Loan-to-Value ratio
The deposit or security provided
The duration of the loan and other factors are evaluated by the lender to assess the risk.
For instance, the interest rates charged for a basic 'buying before selling bridging loan' may be less expensive than those for a complicated development bridging loan.
How Is Interest Repaid On A Bridging Loan?
The method of repaying interest on a bridge loan is subject to the terms and conditions of the loan. Unlike conventional mortgages that have fixed monthly payment options, bridge loans offer borrowers multiple alternatives.
Three common options available for repaying interest on a bridge loan include monthly payments, rolled-up interest, and lump sum payment on the principal and interest.
With monthly interest payments, borrowers pay a fixed amount every month without reducing the borrowed capital.
Rolled-up interest allows borrowers to defer payment of interest until the end of the loan term, where the total interest, along with the principal amount, is paid in one lump sum. This method is helpful in freeing up cash for project development or moving expenses.
Retained interest is a flexible option that works similarly to rolled-up interest. With this option, the maximum interest payable is included in the original loan amount. At the end of the loan term, the borrower repays the full loan amount and receives a refund for any unused interest. The advantage of this option is that there are no additional payments to be made at the end of the loan term.
Unlike conventional borrowing methods, bridge loans do not have early repayment charges due to their short-term nature. This means that borrowers can repay both the interest and the total loan amount before the loan term ends without any complications.
Are Bridging Loan Rates Higher Than Traditional Mortgage Rates
Generally, bridge loans have higher interest rates compared to mortgages due to their shorter duration.
However, the overall costs of a bridge loan may be lower than those of a standard mortgage which lasts for 20-30 years. It should be noted that the interest rates and fees of a bridge loan may vary depending on the borrower's financial situation and the lender's.
How Long Do You Pay Bridging Loan Interest For?
When taking out a bridging loan, it is possible to opt for paying interest only for the months in which the loan is used. If the loan is repaid early, there will be no need to pay interest for the unused months.
Drawdown options are also available with some lenders, which allow borrowers to draw down the loan in stages during the loan term. Interest will only be charged on the amount borrowed at each stage, making it particularly useful for property renovation or development projects.
For instance, a drawdown facility can enable a borrower to access a £2 million development bridging loan in stages, such as £600k upfront, £400k after three months, and the remaining £1m when needed.
Are Bridging Loan Rates Fixed Or Variable?
Bridge loan interest rates are typically determined by the lenders and are fixed. They are influenced by market interest rate fluctuations, but not as close as standard mortgage rates due to the personalized nature of bridging finance.
Additionally, a fixed interest rate ensures that the interest paid remains constant throughout the loan period and is not impacted by changes in UK interest rates. This type of interest rate provides stability and predictability in terms of monthly payments or rolled-up payments at the end of the term.
What Are The Other Costs Associated With Bridging Finance
Apart from the interest payments, there are various expenses that are associated with bridge financing, and it is crucial to have knowledge about them. It is not always the case that the bridge loan with the lowest interest rate is the most affordable one. A reliable broker can provide valuable assistance in this regard.
There are other expenses to consider as well, such as arrangement fees that are charged by lenders for arranging the bridge, which is usually a fixed amount.
Additionally, the lender evaluates the value and suitability of the property used as collateral, which incurs valuation fees. Legal fees and other administrative expenses also need to be taken into account.
Our bridging loan calculator is a comprehensive guide that provides information on bridging loan costs and things to watch out for.
Disclaimer
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Accelerated Finance Limited only considers applications for commercial or investment properties.
Accelerated Finance Limited is not regulated by the financial conduct authority and only provides unregulated loans via our network of lenders. Your property is at risk if you fail to make payments on a Mortgage Contract. Please note that Accelerated Finance Limited and its employees do not give financial advice or recommendations on any product.
