Bridging loans are a very versatile way of securing short-term finance, and can be tailored to suit a variety of circumstances.
You can acquire bridging loans on a first or second charge basis, open or closed bridging loans and bridging loans that come alongside (or even become) other products. But did you know that you can also choose how to pay the interest on your bridging loan?
Traditional monthly repayments
Most bridging loans are structured in such a manner that you will repay the interest on the loan each month, and then repay the full principal at the end of the loan. This method of borrowing suits customers who will have a consistent regular cashflow throughout the lifetime of the loan and will be able to service monthly payments without over-extending themselves.
However, it is also possible to pay off the interest alongside the principal of the loan, and even deduct some or all of the interest from the loan advance.
Rolling the interest on your bridging loan means that you will make no repayments during the lifetime of the loan; rather, you will repay the rolled interest upon the loan’s redemption.
The interest is usually compounded, which means that it will be calculated anew at the end of each loan period (usually a month). So whilst monthly payments reduce the outstanding balance each month and are therefore the same, repayments accrued under compound interest actually become a little larger.
To give an example: repayments on a 12 month, £100,000 loan with interest charged at 0.75% will be £750 per month. The full cost of the loan at redemption will be £109,000.
With compound interest, the first payment will be £750, the second £755.63 (0.75% of £100,750), and so on. The cost of this loan paid with rolling interest will be £109,380.69.
This example only costs an average of £32 per month more than the non-rolling loan, but rolling the interest at higher interest rates, on larger loans or for longer terms can really add up. The flipside is the ability to make full use of the loan without having to worry about monthly repayments, and for borrowers seeking smaller, shorter-term loans, rolling interest can be extremely useful.
Use the calculator below to work out the total cost of a rolling repayment bridging loan vs. a monthly repayment bridging loan.
Rather than pay rolled interest at the end of the loan term or pay it off throughout in monthly instalments, you can also opt to deduct it from the principal at the start of the loan.
In the above example, for instance, you would deduct the £9,000 of regular interest repayments from the loan advance, meaning that you would only receive £93,000. However, you would avoid compound interest and would be free of monthly repayments, giving you the flexibility needed to focus on your project. Structuring a loan in this manner is particularly conducive to longer terms of up to 24 months.
It is also possible to combine any of the above three options. For instance, you could deduct half of the interest from the advance of the loan and then roll the remainder to redemption. You could even deduct half of the interest, roll a proportion of the remainder and then make regular repayments for the last two or three months, when the project is nearly finished. Every bridging loan is a bespoke product tailored to meet the borrower’s needs, so give us a call today on the number at the top of the page or make a bridging loan enquiry to see how we can structure a loan to suit you.