Bridging Loan Interest Rate Explained
Bridging finance is a form of short-term lending intended to assist property investors and owners in bridging a temporary financial shortfall in various situations. Due to their brief duration, bridging loans UK typically have higher interest rates than long-term mortgages and bank loans. Depending on the borrower’s circumstances and the lender chosen, the interest rate on a bridging loan can range from 0.55% to 1% per month on the amount borrowed.
Both specialised bridging lenders and peer-to-peer lending platforms calculate the interest rate based on the risk associated with the borrower. If the borrower has a poor credit score or a high risk of defaulting on the loan, they may be required to pay a higher interest rate. You can take out a commercial or residential bridging loan and the interest rate varies accordingly.
In this article, we will explain bridging loan interest rates so you can decide whether you can afford to take out this loan.
How Do Interest Rates Apply To Bridging loans?
Bridging loan lenders typically charge interest monthly instead of an annual percentage rate (APR) because bridging loans are intended to be used over a short period. Unlike mortgage repayments, which are spread over 30 years or more, a regulated bridging loan is only meant to cover the financial gap between buying and selling property. Borrowers typically repay the loan within a few months to a year.
Charging interest on a monthly basis allows the lender to adjust the interest rate as needed to account for changes in the borrower’s circumstances or the overall risk of the loan. This flexibility is important because the lender needs to ensure that they are adequately compensated for the risk of providing a short-term loan with a potentially higher risk than a long-term mortgage.
What Are Average Bridging Loan Interest Rates?
Bridging loans carry monthly interest rates ranging from 0.4% to 1.5%, which can add up to a significant amount over a year. For instance, a 1% monthly interest rate will translate to 12% over a year, making bridging loan interest much more expensive than typical residential mortgages, which usually have an annual interest rate of 1% to 2%.
For example, if someone borrows £200,000 on a property worth £250,000 at a 0.79% interest rate from Lendinvest, they would have to pay £1,612 per month.
However, interest rates can also be influenced by other factors, such as the condition and location of the property. The lender may charge higher interest rates if the property is in poor condition or dilapidated. Similarly, properties located in popular areas where it’s easier to sell may attract lower interest rates.
How Can You Payoff Interest Rate?
Bridging lenders provide their customers with the flexibility and convenience they need to obtain the necessary funds to meet their financial obligations. These lenders also offer flexible options for interest repayment. Borrowers can pay interest either monthly or at the end of the loan term, depending on their preference and financial situation. It allows borrowers to tailor their loan repayment schedule to their specific needs and helps to ensure that the loan is manageable and affordable.
Monthly Interest
Repaying the interest monthly is a viable option for those with a stable monthly income who can pay the interest each month. Monthly interest rates usually start at 1% per month. For instance, if you borrow £250,000 at a 1% monthly interest rate, you would have to pay £2,500 per month in interest. This option allows borrowers to manage their loan repayment and interest payments predictably and sustainably.
Rolled Up Interest
Instead of opting for monthly payments, borrowers can choose to defer their interest charges and have them added to the loan balance each month. This accumulated total is then paid off at the end of the loan term. It allows borrowers to defer their interest payments and focus on other financial obligations in the short term. Still, it is important to note that this approach can result in a larger overall loan balance and higher interest costs. It is, therefore, crucial to carefully weigh the pros and cons of this option and ensure that it aligns with the borrower’s financial goals and ability to repay the loan.
Retained Interest
Certain lenders offer the option to retain a monthly interest rate, which enables borrowers to meet their loan payments while deferring the interest repayment. The interest can then be repaid in a lump sum at the end of the loan term. For instance, if a borrower takes out £100,000 with a 1% interest rate over 12 months, the total interest charge would amount to £12,000. By retaining this interest amount, the borrower would receive a net amount of £88,000 upon completing the loan transaction. This option provides borrowers with greater flexibility in managing their cash flow and meeting their financial obligations while also enabling them to better plan for the repayment of the loan interest.
Conclusion
In conclusion, bridging loan UK can be a valuable tool for property investors and owners to bridge a temporary financial gap. However, it is important to understand the interest rates associated with these loans, which are typically higher than those of long-term mortgages and bank loans. Bridging loan lenders charge interest monthly, allowing for flexibility in adjusting rates based on changing circumstances and overall risk. While interest rates on bridging loans can vary based on various factors, borrowers have flexible options for interest repayment, including monthly payments, rolled-up interest, and retained interest. By carefully considering their financial goals and ability to repay the loan, borrowers can decide whether a bridging loan is right for them.
