Lenders will typically expect a bridging loan to be paid back within a maximum term of 12 months for a regulated lender and up to 24 months if the lender is non-regulated or a ‘non status’ lender. However the exact timescales vary between lenders and here some of examples of the loan durations below:
West One – 1 month to 18 months
MT Finance – 1 month to 2 years
Holme Finance – 1 month to 1 year
Omni Capital – 1 month to 2 years
Silverstream Finance – 6 months
The fees for bridging loans tend to be higher than a typical mortgage with companies charging between 0.5% and 2% interest per month, arrangement fees of 1% to 2.5% and maybe other costs involved in your project such as valuations and solicitor fees. So given that there can be high fees and bridging loans are common for people who need an injection of cash to buy or renovate a property, it is essential to consider the different repayment structures and find the right one for you and your project.
Standard Monthly Repayments
This involves paying equal monthly repayments on a scheduled rate that you arrange with the lender. Essentially, you are repaying in instalments and this is the most traditional repayment method. For borrowers, it allows them to plan as they know exactly how much they will be repaying each month and over time. The way the repayment works is a combination of interest and capital. The interest refers to the fees charged by the lender (0.5% – 2.0%) and the capital is the amount you have borrowed (up to £25 million). Although the repayment amount each month does not charge, you start by paying more interest of the loan and then eventually this is paid off and you are only paying the capital. This is how a mortgage and most loans work and what it allows you to do is repay some of the interest off early if you want to and this will help you make a bigger saving overall. Read more here.
Rolling Interest Option
With this option, rather than paying the interest and capital simultaneously, you are saving the interest right until the end of the loan term. This allows you to make lower monthly repayments as you are only paying the capital each month and the interest is rolled up until the loan’s redemption. This can be a lot more convenient option for those that are investing and renovating a property and need every extra penny to put towards their investment.
However, by deferring on the interest each month, it is accruing or being ‘compounded’ meaning that your interest is gaining extra interest each month and you will eventually be paying more for the convenience. To give an example, if you take out a bridging loan for £100,000 over 12 months and the interest charged is 1%, you will therefore pay £1,000 per month. If it is a standard monthly repayment, you will pay £1,000 every month and that it is. But with rolling interest, month 2 will be 1% of £1,000 which is £1,010 and then month 3, is 1% of £1,010 which is £1,021 and so forth – so overall it works out to a bit more expensive and you have to weigh that up with the benefits.
It is also possible to take away the interest from your loan altogether with an interest deducted repayment option. This means that you only pay the capital on your loan each month and means you repay lower amounts and certainly do not have to worry about compounding interest. However, because you are taking away the interest, this is now taken away from your loan drawdown (amount you can borrow). So using our original example above, if you are looking to borrow £100,000 over 12 months at 1% interest, you would pay £12,000 worth of interest over the loan term. But since interest is deducted, the amount you borrow will be changed to £88,000. Simple.
Combinations Are Available
It is important to speak to your lender because some are able to offer combinations of the repayment methods above. For instance, you could deduct the interest for the first few months and the roll over the interest for the rest of the loan duration. Or perhaps you prefer to pay in monthly repayments but then due to cashflow, you may want to roll over the interest for the final months. You need to think about your project and cost out every different repayment scenario in order to maximise your return. So it is always recommended to run this past the lender and find the right repayment option for you.
How You Repay Your Loan
Most bridging lenders accept payment via debit card so you are required to set up a standing order, direct debit or the company will take the repayment using a process called continuous payment authority. This involves the provider verifying your debit card during the application stage and then accessing your account on the agreed dates. This means that you do not have to worry about calling up or making a manual repayment each month, it is all taken care of. You will always receive repayment reminders by email or text message on the days leading up to each collection anyway and also receive a confirmation once it has gone through. It is unlikely that a bridging company will allow you to repay using a credit card as this is like using one form of debt to repay another and can lead to financial problems. With so many loans being ‘closed bridging loans,’ most companies expect repayment at the end of the loan term or when the sale of a property or business has been completed.
If you complete your property sale or other investment early, all lenders usually give you the option to repay your loan early. However, most providers charge an ‘exit fee’ for clearing your account early and some say that there is a minimum time period that your loan must be open for e.g 2 months. The reason for this is because bridging loans are usually very high amounts, with some reaching the millions, so for a loan to end over just a few weeks or months with little interest paid, it is hugely risky for the provider and offers little margins.