Bridging loans are short-term financing solutions that provide immediate access to large amounts of funding, and are generally used when traditional mortgages are not an option. They are typically used to ‘bridge’ the gap between the sale of one property and the purchase of another, or to fund property development projects. Perhaps you need a cash injection to finish a project? Or maybe you need extra funds and time before a more traditional source of funding becomes available? While bridging loans offer flexibility, they also come with higher interest rates than standard mortgages.
Depending on your situation, as well as how much equity you have access to, you could borrow anywhere between £50,000 and £10 million. This is usually secured against property development. However, as a general rule, the maximum amount you can borrow, including interest, is limited to around 70% LTV. A key factor which makes bridging loans different, however, is that the loan is not tied to your income. For more information, read our Guide to Bridging Loans, but in this post, we’re going to explore what interest rates you might find on your loan.
Understanding Bridging Loan Interest Rates
Bridging loan interest rates are often calculated monthly and can range from 0.75% to 1.25%. However, the exact interest rate you will be offered will depend on several factors, including:
- Loan-to-value (LTV) ratio: The LTV ratio is the percentage of the property value that you are borrowing. A lower LTV ratio will generally result in a lower interest rate.
- Property type: Different property types may attract different interest rates. For instance, residential properties typically have lower interest rates than commercial properties.
- Purpose of the loan: The purpose of the loan will also affect the interest rate based on the level of risk to the lender. For example, bridging loans for property development may have higher interest rates than loans used to bridge the gap between property sales.
Bridging Loan Interest Rates for Different Repayment Periods
Bridging loans typically have repayment periods of between 6 and 24 months. Evidently, this can impact the total loan amount by a significant margin and is something that should be carefully considered.
Even small variations in the monthly interest rate can have significant impacts on the total loan value. For example, if you take compound interest into account, a 1% monthly interest rate is equivalent to 12.7% APR, and 2% comes out to 26.8%.
Example Calculations for Different Loan Amounts
To illustrate the impact of interest rates on bridging loan repayments, let’s consider the following scenarios:
£100,000 for 12 months
With an average interest rate of 1% per month, the total interest payable on a £100,000 bridging loan for 12 months would be £12,000. This means that the total amount repaid would be £112,000 (£100,000 principal + £12,000 interest).
£250,000 for 24 months
Taking an average interest rate of 1.5% per month, the total interest payable on a £250,000 bridging loan for 24 months would be £36,000. This means that the total amount repaid would be £286,000 (£250,000 principal + £36,000 interest).
£500,000 for 18 months
With an average interest rate of 2% per month, the total interest payable on a £500,000 bridging loan for 18 months would be £60,000. This means that the total amount repaid would be £560,000 (£500,000 principal + £60,000 interest).
Important Bridging Loan Interest Considerations
Bridging loans can be a valuable tool for bridging the gap between property transactions or financing property development projects. However, it’s important to understand the higher interest rates and fees associated with these loans before taking one out. There is an element of risk involved with any loan which needs to be considered. Some key considerations include:
Repayment Capacity: Ensuring you can comfortably afford the monthly repayments, including interest and fees.
Exit Strategy: This is a vital part of any bridging loan and can make the difference between your loan being approved or not. You’ll need to be able to demonstrate a viable exit strategy either in the form of the sale of the property or via alternative financing.
Interest Rate Fluctuations: Interest rates can change, so factor in potential interest rate rises when calculating your budget. While your agreement will not change, the current volatility of the UK economy could mean that interest rates could change in the period between planning your project and applying for your bridging loan.
If you’re interested in a bridging loan and feel it could be the solution to your needs, don’t hesitate to contact us to discuss your options or apply in principle for a quick decision.
