Understanding the Interest on Your Bridging Loan
Unlike mortgages, Bridging Loans are expected to be used as a short-term funding source, usually under 12 months. This is, in part, the reason why bridging loans can be a much more expensive lending source, the rates for this kind of loan range from 8 to 15% whereas as current mortgage rates currently sit at under 4% on average. Interest will be paid in installments throughout the length or your bridging loan arrangement. The rest of the loan amount will then be paid once the loan term is up, usually upon the sale of the property or once a mortgage has been secured for the property.
Loan to Value (LTV) will of course have an impact on the interest you pay on your loan. When taking out a mortgage, the LTV will be based on the value that you purchase the property at rather than the market value. So, if you manage to bag a really good deal on a property, say the property is worth 100k and you manage to get hold of it for 70k, the mortgage lender will take the value at 70k. A 70% LTV on 70k would mean you could borrow 49k minus fees and therefore you would pay interest on the 49k. However, with a bridging loan lender, there may be other options that leave you with more cash but, as a result, slightly more interest to pay. Some UK Bank Bridging Loans work exactly as a mortgage would (outlined above), others, may accept the market worth of the property as the Loan to Value worth, therefore if the property you have just nabbed for 70k instead of 100k has this agreement arranged for it, you would get a loan for 70% of 100k rather than the 49k minus fees which could leave you with quite a lot extra in your pocket (21k in this example!) for project development or emergencies. It does of course, mean that you will need to be careful when considering your interest payments as this would mean paying you 8-15% on an extra 21k every month so weighing up the benefits and the correct arrangement for your project is extremely important.
In addition, some bridging loan lenders will even provide the loan based on the value that the property will be worth one your project is completed. The risk here for lenders is higher and therefore you can expect that the interest rates will probably be higher also. This kind of loan takes the Gross Development Value or GDV into account, so you’ve just bought the property for 70k, it is currently worth 100k on the market value and once you have completed the project the value should reach 125k. Sticking with the 70% as an example, this kind of financing arrangement would hand over 87.5k minus fees, this is 38 thousand 500 pounds more than a normal mortgage on the same property! The interest in this example, working on an average 12% interest rate would leave you paying around 1% each month, 875 x 12 = 10,500 pounds over 12 months and then the 87.5k once the property is completed, so in this example that is 98k plus fees overall. Please note these are very rough figures for example purposes only and you should always seek advice from a broker or financial advisor before considering a bridging loan.
The above examples are based on you arranging to ‘service’ the interest, which is basically paying as you go. You may also be given the option to ‘Roll Up’ the interest which will allow you to pay off the interest at the end of the project along with the final payments of the loan. Alternatively, the interest can be ‘Withheld’ by the lender so that this is taken from the loan amount at the beginning of the process, so you receive your loan amount minus the fees. Each scenario may have their benefits for different situations but it’s important to bear them in mind when comparing providers.
If you decide to look further into bridging finance as an option for your development project, then it would be worth comparing a number of loan providers as you may get slightly different options from each of them. It is worth comparing NatWest Bridging Loans against other providers as they tend to have a competitive rate, are a well-known financial organisation and can quite often have the funds to you before the week is out. This kind of turn around time can be very attractive if the reason for the loan is to be able to act fast on an auction property where you have to have the funds available and be in a position to act as a cash buyer. It is worth noting that bridging loans are not always taken out just for the purpose of property development and that they are a reasonable funding option for home improvements, and other unexpected costs so long as the interest charges have been taken into account there is evidence of how the funds are to be returned and the loan is a short-term solution.
As you start comparing bridging finance options do not forget to take into account other fees that you may incur on top of the interest rates. Many providers can also charge; legal fees, exit fees, arrangement fees, broker fees and or a fee for the initial valuation so be sure to add these to your calculations before settling on a provider.