Calculating Bridging loan interest
I have always found that when discussing bridging loans and bridging finance options with clients and even other mortgage professionals there are always queries when it comes to how the loan interest will be calculated. Why? Different lenders use different methods for calculating the loan interest, these are called either Serviced interest, Rolled up interest or Retained interest. The aim of this blog post is to try to clear this up and explain how the different interest methods are used and calculated.
Lets start with Serviced interest, this is a commonly understood method, utilised across the finance industry and means you will be paying the monthly interest incurred on your bridging loan on an interest only basis. You will still need to repay the original loan amount and any other associated fees and charges that may have been added at the end of the loan term. This works in the same way as an interest only mortgage would, for example.
Example: £110,000 loan + £10,000 fees = £110,000 x 0.49% per month interest = £539 monthly payment until the loan is redeemed or you reach the end of the agreed term.
Rolled up interest. This means that the interest accrued on the gross loan amount (including fees) will be rolled up and added to the outstanding amount on a monthly basis, until the mortgage is redeemed or you reach the end of the loan term. This will compound the interest amount payable (interest payable on interest already added the month before) and may be more expensive over the term of the loan and should therefore be considered carefully. Also be aware that there aren't any monthly payments required as the total loan and interest will be paid upon redemption of the loan.
Example: £100,000 loan + £10,000 fees = £110,000 x 0.49% per month interest rate = £539 interest in month one. Month two interest will be £110,539 x 0.49% = £541.64 then added and so on. You can see how the compounded interest can start to increase. In this example, if the loan runs for a full 12 months the total will £116,645.19. NB - You will only pay interest until the loan is redeemed.
Retained interest means the lender will calculate the interest that is required for the whole mortgage term, using the net loan amount required plus any fees or charges being added to it, based on the percentage rate being offered. This interest figure is then added, providing a total gross loan amount being offered by the lender. Again in this scenario, there aren't any monthly payments required as the total loan and interest will be paid upon redemption of the loan. As you have already paid the interest for the whole loan term, any unused interest (if you repay the loan earlier) will be calculated by the lender and rebated back to you upon redemption via your solicitor.
Example: £100,000 loan + £10,000 fees = £110,000. The loan term is 12 months so interest will be worked out over the 12 months at 0.49% = £539 x 12. Total interest is £6,468 and added to the £110,000 giving a total gross loan of £116,468. NB - If the loan is repaid earlier then there is also a rebate of interest unused.
If you have any other questions or need more help on what would be the best method for you and your circumstances please do get in touch to discuss further.