How Bridging Loan Rates Work: A Comprehensive Guide
Understanding bridging loan interest rates is crucial to make informed financial decisions. Learn how interest rates are calculated, the factors that influence them, and how to get the best deal for your bridging loan.
What are Bridging Loan Interest Rates?
Bridging loan interest rates are the fees charged by lenders when taking out the loan. Interest rates for bridge loans are similar to other forms of borrowing, such as with a mortgage.
The big difference, however, is that bridge loan interest in paid over a shorter period – increasing the cost – whereas, interest paid over a long-term of a mortgage, is less expensive.
Despite this, bridge loans are still a valuable alternative to traditional borrowing as they allow borrowers to quickly access funds, and are much more flexible. Bridge loans offer several benefits which outweigh the high interest, including:
- Fast access to funds
- Flexible repayment options
- No early repayment penalties
- Wide in applicability; they can be used for unmortgageable properties, or large scale projects that cannot be funded through traditional means i.e. a mortgage.
Additionally, there are ways in which costs can be reduced. For instance, finding a reputable lender, offering favourable rates, can be a good way to keep interest costs down.
What Is The Typical Interest Rate on a Bridging Loan?
While you can use our online bridge loan calculator to get an indicative quote regarding costs, there is not necessarily an average or “typical” interest rate for bridging loans – they are calculated based on a number of factors, and lenders rates vary.
“Here at Bridging Loans Direct, we can bridge the gap between you and suitable bridging loan companies, let us help you find the right lender with the best possible interest rate.”
- Sam O'Neil, Head of Bridging
How Are Bridge Loan Interest Rates Calculated?
Unlike traditional mortgages, bridging loan interest rates are quoted on a monthly basis due to their short-term nature.
This means that the interest rate is set by the lender and is commonly paid monthly alongside the repayment of the overall loan.
Keep in mind, that with a bridge loan, the rate will be quoted as a monthly rate, while a standard mortgage is quoted as an annual percentage rate (APR).
The calculation of a bridge loan will be based on a number of factors:
- The total amount borrowed
- The loan-to-value (LTV) ratio
- The amount of deposit or security put down
- The length of the loan term
- The lender's assessment of the borrower's creditworthiness and potential risk
Other factors that may be taken into account include the purpose of the loan, the location and type of property being used as security, and the borrower's income and employment status. Additionally, current market conditions may always affect interest rates offered by lenders.
The interest rate for a bridging loan is typically higher than that of a traditional mortgage, reflecting the higher level of risk involved for the lender. It's important to shop around and compare offers from different lenders to ensure you're getting the best deal on a bridging loan.
In this case study, we rescued a client's property plans from collapse with our swift and effective £160k bridging loan solution in Surrey. Explore the details of this time-sensitive success story.
What Are The Methods For Repaying Bridge Loan Interest?
With bridge loans, you have a few different methods for repaying interest. Some of these options differ from what a traditional mortgage allows.
Here are the three common methods of repaying interest on a bridge loan and how they work:
- Monthly interest payments – This option will be the same as a standard mortgage - the borrower makes payments monthly at a set amount, and repays interest on the loan each month. With this option, capital borrowed is not reduced as the principle amount is repaid at the terms end in a lump sum.
- Rolled-up interest – This option allows borrowers to defer payment of interest until the end of the loan term. Any owed interest is added to the principal amount and, subsequently, repaid at the terms end. This option is great for those holding a loan for a shorter period of time.
- Retained interest – Lastly, retained interest allows borrowers to pay only part of the interest monthly, with remaining interest being retained by the lender, to be paid at the end of the loan term. Compared to rolled-up interest, this options is good for holding a loan for a longer period.
Are There Additional Fees Associated With Bridge Loans?
Yes – interest rates are not the only cost you must consider when applying for a bridge loan, excluding the principle amount of the loan. While it is great to find a lender offering a cheaper interest rate, this is not necessarily an indication that it will be the most suitable loan for you – or that there are not extra costs within the terms of the loan, and for facilitating the loan.
To get a fuller understanding of the overall bridging loan cost you can expect to pay, you should also consider:
- Arrangement fees – these are fixed fees, charged by lenders, for the purpose of facilitating the bridge loan.
- Valuation fees - property used as security for a loan must be evaluated by a lender to determine its worth and suitability.
- Legal fees – sometimes dual representation is available, where a borrower is able to utilise a lenders solicitors rather than organise their own. This can reduce costs.
- Additional admin fees
Working with a bridging loan broker can also help you navigate the various fees and find the most cost-effective option for your needs.
How Long do You Pay Bridging Loan Interest for?
The length of time you pay bridging loan interest for will depend on the terms and conditions of your specific loan agreement.
With bridge loans spanning shorter repayment periods (usually ranging from 3 months to 24 months) interest payments will be due for the duration of the loan term.
Some lenders offer flexible drawdown options, allowing borrowers to only pay interest an amount drawn down at each stage of the loan.
Discover how a timely bridging loan solution transformed a stalled home extension project, allowing a couple to bypass pension drawdown delays and swiftly complete their dream home. Read on for a compelling solution that bridged the financial gap.
To get a clearer understanding of your options, it is always best to discuss first with both your lender and broker. A broker will help with clarity when it comes to loan agreements and will breakdown exactly how much you’ll be paying and for how long.
How Can I Find the Best Bridging Loan Interest Rate?
Finding the best bridging loan interest rates can be challenging, but with our expert guidance, you can secure a deal that works for you. We'll help you navigate the market and find the lenders offering the most competitive rates.
Here are some key points to bear in mind:
- Understand your own circumstances and requirements.
- Research the different private lenders and their areas of specialisation.
- Utilise bridging loan brokers who have the knowledge to find the right lender for your needs.
- Compare quotes from multiple lenders and bridging loan companies to ensure you are getting a competitive rate.
Do not hesitate to contact us at 0800 368 9344 if you have inquires about bridging loan interest rates, bridging loan comparisons, or the bridging loan application process - we can help find the right deal for you, across the entire short term market from a variety of specialist lenders.
Are interest rates fixed or variable?
Not all interest rates on a bridge loan are a fixed rate. Variable interest rates can also be offered, which can change over time based on the lender's discretion or market factors. It's important to carefully review the terms and conditions of any loan agreement to understand what type of interest rate is being offered and how it may change over time, or if it’s the right choice for your financial circumstances.
What happens if I can’t make interest payments on a bridge loan?
If you default on a bridge loans interest payments, it can have a negative impact on your credit score. Defaulting on any loan can cause your credit score to decrease, making it harder for you to secure credit in the future. Additionally, if your lender takes legal action against you to recover the outstanding debt and money owed, it can also have an adverse effect on your credit rating. It's important to speak with your lender and seek advice from a financial advisor if you are having difficulty making your interest payments.
Can I get a bridging loan with a low interest rate?
While possible, it may not always be the best option for you. Before looking at cheaper options, you’ll want to research the whole of the market to find the most appropriate option for you, regardless of interest rate.
This is something a broker can help with; identifying a lender with a favourable interest rate, and determining whether a bridge loan is financial viable for you.