What is the best way to pay the interest on a bridging loan?
The answer to this one is it depends who’s asking!
There are three ways in which a borrower using bridging finance can pay the interest due on their loans: pay as you go monthly, or interest rolled up in the loan, or retained interest. Sometimes the lender will fix which way they want and sometimes the borrower can choose. One point to note here is that the rate of interest that you pay is fixed at outset and usually quoted as a rate per month and not as one normally sees as a rate per annum or an APR.
The simplest method to describe is monthly interest payment and most people are familiar with this concept. Quite simply it’s just any other another monthly mortgage payment. This suits those that have strong cash flow that will not be affected by the project for which the bridge is required.
With rolled up interest, the interest due each month is rolled into the loan on a monthly basis. Some lenders will consolidate the interest at the end of the agreed term of the bridge and some will consolidate it each month i.e. you would be paying interest on interest.
Retained interest is currently the most favoured route offered by lenders. Here the total interest due for the term of the bridge is calculated at outset and is deducted from the advance. Of course, if the circumstances allow, you can increase the amount that you request to take account of this. If the borrower settles the bridge early, most lenders will give a refund of retained interest.
The real benefit of using the retained interest or roll up loan is that the borrower need make no monthly payments on the loan, which is great for developers as they only derive income at the end of the project when a property is sold.
So when it comes to interest options, its “horses for courses”!