Understanding The Different Types Of Bridging Loan Interest Before You Invest In Property

Investing in a property development can be daunting for clients who are new to the industry. Bridging loan finance is becoming an increasingly popular form of finance as a result of many mortgage market contracts only lending to specific criteria. As a result, more potential property developers are looking for information on this type of finance, and how it works on the property development plans in which they are looking to invest. One of the most important considerations for investors looking at obtaining residential bridging loans is the different type of loan interest that can be attributed to this form of finance. Here, we’re breaking this down into the different types of finance that you need to know about prior to investing in property for purchase, renovation or development purposes.
Serviced Interest
Serviced interest works in a similar manner to regular mortgage or loan options that you may already be familiar with when you’re considering investing. The purpose of a bridging loan is that you are provided with the finance much more quickly than what you would be a regular mortgage, and these loans are often for much smaller amounts. Serviced interest on a bridging loan will mean that you are making monthly interest payments on the amount that you have borrowed.
While this is a generally popular option for standard loans, when it comes to bridging loan finance, this is actually one of the least common options, as many property investors/developers tend to pay off the full amount at the end of the loan term. This is why there is a need for the following two bridging loan interest options.
Capitalised Interest
Capitalised interest, also known as rolled up interest, is a type of interest which is added to the outstanding principal amount of the loan. This means that there are no monthly interest payments. While these interest repayments are then compounded at the end of the loan, meaning they are often larger than if they were spread across the loan term, they are suited to those who do not have a regular cashflow and therefore cannot cover regular interest repayments.
It is important to know that with rolled up interest, as well as retained interest which we will discuss shortly, the loan plus any interest must not exceed the lender’s maximum LTV criteria.
Retained Interest
Retained interest on the other hand acts as a sort of middle-ground between serviced interest and capitalised interest. Retained interest is often used to help make monthly interest payments much more manageable for borrowers of a bridging loan. Lenders will allow you to retain a certain amount which will represent a set number of monthly repayments, depending on the lending criteria and number of months chosen by the borrower.
Simply put, the lender will add the interest to the full balance of the loan, which will then ultimately pay for the interest at the end of each month.
An example of this is if you want to borrow £100,000 over the period of a year. The actual amount that you will end up borrowing with all of the fees and charges included, could be, for example, £114,000.
Understanding the different types of interest which can be attributed to your bridging loan is important in order to help you to choose the right type of loan for your requirements. This can ensure that you are not caught with any monthly repayments that you cannot afford if you do not have regular cashflow, or a huge lump sum at the end of the loan term which you were unaware of.