Bridging Loan Interest Rates Explained

When you borrow money from a lender, interest rates are one of the main ways they make money on their investment in you.

There are typically two approaches to how they collect this interest: charge a lower rate over a longer period of time as is typical with mortgages, or charge a higher rate for the privilege of you not having debt looming over you for decades.

What Are the Usual Interest Rates for Bridging Loans?

Bridging loan interest rates for domestic properties tend to start at around 0.54% monthly, or 6.68% APR, for a loan-to-value of up to 50%. The highest rate for LTV from 70-75% is around 1.15% monthly. Commercial interest rates are higher.

Bridging loans fall into the latter category here. The big appeal of bridging loans is that they allow you to borrow large amounts of money quickly.

But this also comes at the cost of a higher interest rate for the convenience of having that stepping stone made available to you.

So how do bridging loan interest rates work?

This guide looks at different types of bridging loans, what you can use them for and how much you have to pay back in interest.

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How Do Bridging Loans Work?

A bridging loan is a short-term finance option where the amount you borrow is secured against your property. In that respect, bridging loans work in a similar way to mortgages - you borrow money from a lender, and if you can’t make the repayments or refinance at the end of the term, you risk your home being repossessed to pay off your debts.

The big difference between mortgages and bridging loans is that bridging loans are only ever intended to be short term - they’re a way for you to free up some cash to make a purchase before other money comes in, either from a property sale or a longer-term refinance option. This means loan terms typically range from 1 month up to 2 years, depending on the lender.

Bridging loans are useful if you want to buy a property quickly or are looking to buy somewhere else before the sale of your current home is completed. Bridging loans are also attractive options for property developers looking to invest in property down the buy-to-let route or pay for renovation works or for commercial business ventures.

How Do Interest Rates Work for Bridging Loans?

As with most loans, interest rates can either be fixed or variable. This means the interest rate either stays the same over the term of the loan or can be varied by the lender.

How Is Interest Charged on a Bridging Loan?

With bridging loans being short term - and typically lasting for months rather than years - the interest tends to be calculated on a monthly basis rather than annually. This means that even a small fluctuation in the interest rate can massively ramp up the cost of your loan.

There are a few different ways you can be charged interest on a bridging loan:

• Monthly repayments: With this option, you pay the interest as you go. It isn’t added onto the amount you owe at the end of the bridging loan term.

• Rolled up repayments: With this option, the interest gets added on in monthly instalments, but you don’t pay any of it off until the term ends. Then you’ll pay off the original balance plus all of the interest added on in one go.

• Retained: With this option, you borrow the interest on the loan too for an agreed period e.g. 6 months. You pay everything back at the end when the loan’s term is up.

There are usually other fees on top of the interest charged to. This can include arrangement fees, legal fees, valuation or surveyor fees and administration fees. Make sure to factor these into your decision when looking at different finance options.

What Factors Influence Bridging Loan Interest Rates?

Ultimately, it’s up to the lender. Interest rates usually change in line with the Bank of England changing their base rate. At this point, it’s common that lenders across the industry will all change their interest rates and charge anywhere between 0.4% and 2% monthly interest.

A lender will probably consider the following when calculating the interest rate you will be charged on your bridging loan:

• The amount of money you want to borrow (as a ratio of loan-to-value, or LTV)
• The type, age, condition and location of the property the loan is secured against
• The duration of the loan term and if there is a fixed due date set for repayment
• Whether the loan would be a first charge or second charge bridging loan 
• Your affordability based on your income and ability to meet repayments
• Your credit score and whether you have any history or bad credit

What Interest Rates Can You Expect on a Bridging Loan?

As we’ve seen, the interest rate on a bridging loan depends on various factors. For example, the more you want to borrow (higher LTV value), the higher your interest rate will be and the more it will cost you overall. This is one of the key things that can influence interest rates.

To give you an idea of what you can expect, the bridging loan interest rate might look something like this for residential bridging loans. For commercial loans, it’s often higher.

Table for comparison purposes only and doesn’t necessarily reflect current market rates.

As you can see, bridging loans can be an expensive way to borrow money - especially when borrowing a lot of money. But they still are a viable way of borrowing for many people as the profits made from a house sale can often easily cover the amount borrowed plus the interest charged, even if it is at a higher rate than you’d see in more long term ways of borrowing.

As with any form of borrowing, make sure you know exactly how you will repay what you owe before you take out any money. It’s always a good idea to speak to an independent financial advisor for guidance or advice before making your own informed decisions.

How Can Money Savings Advice Help You With Bridging Loans?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Bridging Loans brokers. They have already helped thousands of people get the best Bridging Loan deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.