Bridging loan interest rates are usually higher than traditional home loans because they are only meant to be short term.
And as interest rates are grabbing headlines at the moment, you may wonder if it makes a difference to bridging loans.
Here, in our latest blog, we’ll look at what you need to know about bridging loan interest rates and how they are affected when the Bank of England cuts rates.
What are interest rates?
When it comes to loans, interest rates are what you pay your lender for borrowing their money. It’s not a fee, but it’s how a lender earns money on taking the risk of lending.
The rates are shown as a percentage of the amount you have borrowed. They often follow the Bank of England’s interest rate but that doesn’t mean the rate lenders offer will fall or rise by the exact same amount in percentage points.
The Bank Rate is set by the Bank of England’s Monetary Policy Committee (MPC) and is used to determine what rate the BoE charges banks for holding money with them, that’s why it’s such a key figure in the economy.
In theory, the Bank of England uses the interest to keep inflation down and the economy ticking over, so, when there are economic headwinds, it’s a way they can keep money moving around, in theory, at least!
In August this year, the Bank of England cut interest to 4%, which is the lowest level in two years and as inflation recently rose, so there is a chance that interest rates might be cut again.
But no matter where interest rates are, how are they likely to affect the rates you pay on a bridging loan?
What are bridging loan interest rates?
As bridging loans are short term, the interest rates on them are calculated monthly. Interest rates on traditional – or term – loans are normally calculated annually.
The interest rate of a bridging loan is decided by the lender but they are usually between 0.5% and 2% per month. That is the same as an annual rate of 6% to 24%. Be aware, the monthly rate could be higher, so make sure you check.
Bridging loans are normally paid back within 6 to 15 months, which is why the interest rates are calculated monthly.
Lenders take a variety of factors into account when deciding the interest rate, these include:
- Loan-to-Value Ratio (LTV)
- Type of property
- Exit strategy
- Credit history of the borrower
- How quickly you need the loan
That means the rates can be different depending on an individual’s circumstances.
How bridging loan interest is repaid
As with any traditional loan, such as a mortgage, the interest rate is often paid in a lump sum at the end of the loan’s agreed term, however, that’s not the only way it can be repaid. You can often choose your repayment method depending on your loan agreement. These are the three main ways that interest is usually repaid.
1. Monthly payments
Borrowers will make monthly payments at a set amount that covers the interest but not the original amount. That amount will be paid off at the end of the loan when your exit strategy is completed.
2. Rolled-up interest
No interest payments are made during the loan term in this instance. At the end of the agreed term, the borrower repays the total amount, plus interest, in a lump sum. It can help you if you need cash flow for a project property, for example but it can also be a big financial risk.
Retained interest
With this option, the lender adds all the interest to the balance and pays the interest when it falls due each month. The borrower is effectively borrowing the interest payments on top of the loan. It means there are no extra payments to worry about at the end of the loan.
Are bridging loan interest rates affected by bank rates?
Bridging loan interest rates are fixed and set by the lenders but as the rates are usually fixed, the interest you pay will remain the same for the period of the loan.
When the rates are originally set they can be affected by the Bank of England’s interest rates but the fluctuations may not be in line with the Bank’s base rate. They are less likely to follow the fluctuations in the way mortgage rates do. When they do fall, they can become more attractive to borrowers. That is especially the case for buyers who are looking to flip properties.
Should I use a bridging loan?
If you would like to know more about bridging loans and how interest repayments work, you can contact our experienced team for help. Contact us today for a chat.
Remember, your home could be at risk if you do not keep up repayments on a loan secured on your property.
