How bridging loan interest works
Bridging loans are short-term loans secured on property, often used to buy a new home before the old one sells, or to buy a property quickly at auction. They're usually priced at a monthly interest rate rather than an annual one, and are repaid in one go at the end, typically from a sale or a remortgage.
With rolled-up interest, nothing is paid each month. Interest is added to the loan and compounded monthly, and you repay the loan plus all the interest at the end.
With retained interest, the lender deducts the interest for the whole term from the loan up front. To receive the amount you need, you have to borrow a larger gross loan: the amount you need divided by 1 minus the monthly rate times the number of months. You repay the gross loan at the end.
With serviced interest, you pay the interest each month, so the balance stays the same and you repay the original loan at the end. Arrangement and exit fees are worked out as a percentage of the amount you need, and the exit fee is included in what you repay at the end.
Worked example
Borrowing £250,000 for 12 months at 0.85% a month with rolled-up interest, the interest comes to £26,726.56. A 2% arrangement fee adds £5,000, so the total cost of borrowing is £31,726.56 and you'd repay £276,726.56 at the end, plus the fee if it isn't paid up front.
With retained interest, you'd need a gross loan of £278,396.44 to receive £250,000, so the interest is £28,396.44 and the total cost £33,396.44. With serviced interest, you'd pay £2,125 a month, £25,500 in interest over the year and £30,500 in total with the fee.
Other costs and risks
Lenders' methods vary. Some charge interest daily, take fees as a percentage of the gross loan, or add the arrangement fee to the loan, so use this as a guide and check the figures in your quote.
Budget for valuation, legal and broker fees too. Because the loan is secured on property, you could lose it if you can't repay on time, and extending a bridging loan beyond its term can be expensive. Have a clear way to repay before you borrow.
Inputs for the bridging loan calculator
Amount you need
The net amount you need to receive from the lender. With retained interest, you'll borrow more than this so the interest can be deducted up front.
Interest rate (per month)
The monthly interest rate from your quote. The rate shown is only an example.
Term
How many months you'll keep the loan, from 1 to 60.
How interest is paid
Rolled up adds interest to the loan each month and you pay it all at the end. Retained deducts the whole term's interest from the loan up front. Serviced means you pay the interest each month.
Arrangement fee
The lender's fee for setting up the loan, as a percentage of the amount you need.
Exit fee
A fee some lenders charge when you repay, as a percentage of the amount you need. Enter 0 if there isn't one.
CALCULATOR QUESTIONS
Bridging loan calculator questions
How much does a bridging loan cost?
It depends on the rate, term, fees and how interest is paid. Borrowing £250,000 for 12 months at 0.85% a month with rolled-up interest and a 2% arrangement fee costs £31,726.56.
Which way of paying interest is cheapest?
Serviced interest usually costs least, because interest isn't charged on interest. Rolled-up interest compounds, and retained interest is charged on a larger gross loan. But serviced interest needs you to afford monthly payments.
Why is the gross loan bigger with retained interest?
The lender keeps back the interest for the whole term when the loan starts. To still receive the amount you need, you borrow more, and interest is charged on that larger amount.
What happens if I can't repay at the end of the term?
You may be able to extend, but usually at extra cost. Because the loan is secured on property, the lender could repossess it if you can't repay.