This is The Bridge Crowd guide to understanding bridging loan rates for anyone interested in this type of alternative finance.
There’s no doubt that while the bridging finance application process is a simple and quick one, understanding how these loans work is not always as straightforward.
This means some people may still be wary about the potential that bridging finance can do to resolve a financial issue, for example, to buy or develop a property.
There are a number of issues to consider before you look at bridging loan rates, including:
- What is your bridging loan for?
- How long is it needed?
- What type of security do you need to access it?
- How much do you want to borrow?
These are just simple questions from a long list that potential bridging finance applicants may have in mind.
What is a bridging loan?
So, what is a bridging loan? The best way to understand these loans is that they are a type of short-term debt used by borrowers to help cover a gap in their finances.
The loans can be taken out for just a few days and up to two years, though generally, they run for around one year.
This means that a business, for example, can continue its operations when revenues may fall and for someone who may need to pay an urgent and unexpected tax bill.
However, most people will be aware of bridging finance as a way to buy property when selling your current home. The finance essentially bridges the gap between spending money on a new home and having the cash to pay for it.
How does bridging finance work?
Since a bridging loan is a form of secured loan, it means you will need a property, or a high-value asset, such as land, to access one.
This asset is then used as security and should you fail to repay the loan within the agreed term, then you face the prospect of the property being repossessed.
The value of the security property also dictates how much you can borrow when using a bridging loan. Most lenders will usually offer between 65% and 80% of the asset’s total value.
Also, you will need to appreciate that an independent surveyor will be required to assess the property’s condition and value which will then provide the lender with a quote that is based on their loan-to-value criteria.
Bridging loan interest rates UK
This then brings us to bridging loan interest rates UK because you will then need to pay interest on any bridging loan.
It’s also worth noting that the interest rates being quoted by lenders will be higher than for most other forms of finance.
This also means that you’ll need to understand what your ‘exit route’ will be which effectively means you will know how and when you’re able to repay your bridging loan.
For most potential borrowers, they will repay the bridging finance when the sale of a property comes through and they have the finances to repay.
We’ve also mentioned the length of a loan, as you may find that lenders will charge more for those who require their bridging finance over a longer period than those requiring money for a short time.
Rates for a bridging loan UK
Another important aspect when you need to consider rates for a bridging loan UK, is the type of bridging loan will also dictate these rates.
For example, we mentioned having an exit route in mind and if you know how and when you can repay the money, then this will be a ‘closed’ bridging loan. These types of loans tend to have lower rates of interest.
For those who sign up for an ‘open’ bridging loan means they have no end date for when they are able to repay.
This then obviously means that this type of bridging finance is more expensive because there’s more of a risk to the lender when agreeing to the loan.
Finally, UK bridging loan rates can be paid back in three ways, which are:
- Monthly: the borrower repays the interest every month and this is not added to the loan’s final balance.
- Rolled up: the borrower makes no monthly interest payments and all the interest is then ‘rolled up’ to be paid at the end of the term.
- Retained interest: this is when a borrower includes their interest payments as part of the total loan which is then paid along with the loan itself when the term date falls due.
If you would like more help and information when it comes to understanding bridging loan rates, then you need to speak with the experts at The Bridge Crowd.