Skip to content 
With regards to financial options, perhaps one of the most common things that borrowers wish to know about bridging loans is the interest rate that these loans charge compared to a standard bank loan. Of course, while each loan has its own place and the reasons for charging the interest that they do, these may be considerations for borrowers.
Lets grasp how bridging interest works when borrowing money
The interest rate for a bridging loan is typically higher than what a standard bank loan will charge. Of course, this makes a certain amount of sense when one considers what a bridging loan actually is. Bridging loans are short-term loans that are flexible and able to be accessed in a short period of time. This, of course, is because a standard bank loan may not be able to be accessed in a short period of time.
The interest rate for a bridging loan is typically charged on a month-by-month basis. Of course, this may seem like a rather higher interest rate than what a standard bank loan would charge. However, it’s also rather important to consider the fact that a bridging loan is not held for a long period of time. Indeed, whereas a standard bank loan may be held for a number of years, a bridging loan may only be held for a number of months.
To help understand the interest rate charged on a bridging loan, a bridging loan interest rate calculator may be useful.
How bank loan interest differs
If we consider the case of traditional bank loans, including mortgages and other secured loans, we can see that the interest rate of these loans is lower. This can be understood by the following reasons:
- Long-term loans
- Long time taken to process the loans
- Only income and affordability checked while approving the loans
With these low-risk criteria set in place, banks can provide loans with lower interest rates.
Bridging finance interest rates are higher because they are based on different realities to conventional bank lending. The following are the realities that make bridging finance interest rates higher:
- Speed is important. The lending community can complete deals in days or weeks, as opposed to months. There is a price to pay for this.
- Criteria are less strict. The decision to lend is based on the asset and the exit strategy rather than strict income multipliers, which makes it riskier.
- It’s a short-term solution. The interest structure reflects that it’s only being borrowed for a short time.
- They’re used to fund tricky deals. Bridging finance is used when conventional funding isn’t possible: auctions, refurbishment, or unusual property types.
How much interest do you pay on a bridging loan?
One of the common questions borrowers ask about bridging loans is how much interest they will have to pay.
The answer to this question isn’t straightforward. It will depend on a number of factors, including:
- Amount borrowed
- Loan to value
- Type of property
- Level of experience of borrower
- Strength of exit strategy
The interest rate will be expressed as a monthly rate, ranging from 0.6% to 1.8% per month. However, it will depend on how long the loan takes to be repaid.
You can use an estimation calculator to gain a better understanding of the total amount payable.
The exit strategy is important
One of the differences between bridging loans and bank loans is the exit plan. An exit plan can be achieved in the following ways:
- Sale of the property
- Refinancing of the property into a mortgage loan
- Sale of another asset
Bridging loans are short-term loans. Therefore, paying earlier will reduce the costs.
Choosing the right route
Bridging finance and bank loans are not competitors. They serve two different purposes.
If you need long-term and cheap finance and have the time and patience for a thorough evaluation, a bank loan may be the choice. However, when speed, flexibility, and the ability to take action quickly are most important, bridging finance may be the winner, even though the interest rate may be higher.
You need to understand the value of pricing and opportunities. Sometimes, the speed at which a deal is closed may be more important than the interest you pay.