Different Types of Bridging Loan Interest

Getting a bridging loan is increasingly becoming a popular form of finance. As the mortgage market contracts and will now only lend against properties that are "habitable", many would-be Property developers are finding that they need to take a Bridging loan to finance works on their properties before they can be let out and refinanced with a Buy to Let mortgage or sold on. The Bridging Loan market has therefore expanded rapidly and so too has the range of products. This article attempts to explain the three main types of interest plans a Bridging Loan can come with. 1. Serviced Interest: This works just like a regular mortgage or loan that you may be familiar with. The borrower simply makes monthly interest payments on the amount borrowed (interest only, not capital). In practice it's probably the least used method of paying interest as Bridging loan borrowers in general prefer to pay everything off at the end, hence th eneed for the next two options. 2. Rolled up interest: Here at the outset of the loan the future interest payments are calculated and simply added to the repayment amount. This means the Borrower doesn't have to make any monthly payments but pays everything off in one hit at the end. As an example, if the borrower took a £100,000 loan at 1% per month for 6 months then, ignoring fees and charges, this would mean that they made no payments for 6 months and at the end they had £106,000 to repay. Crucially here there is no interest charged on the interest and so this is a method preferred by many borrowers, though only offered by a few lenders. 3. Retained interest: Again at the outset of the loan the future interest payments are calculated and added to the loan and, once again, this means the borrower has no monthly payments to make. The crucial difference here is that then the interest rate is charged on the entire amount of capital and interest so, in effect, you are paying interest on the interest. It may not surprise you to learn that this is the most popular method employed by Lenders and it is largely the market norm. This last method in particular has caused some controversy and comment from the FSA. If a bridging loan is advertised at a rate of, say 1% per month, but this retained Interest model is used to calculate the payments, this affects the APR of the loan. In particular if the loan is on a regulated property (residential first charge) then there is an argument that the advertising of a loan at 1% per month is inaccurate and/or misleading. The FSA is certainly having words to say about this and it could well result in Bridging lenders having to make repayments for mis-selling. Whatever the method used, at Choice Loans we will ensure your payments are made very clear to you at the outset so you know exactly where you stand. For further information or to enquire about a Bridging Loan either complete our Enquiry form here or call us on 0845 1260350