A Bridging loan is an excellent financial tool for individuals or businesses that need quick, short-term funding, typically when there’s a gap between buying a new property and selling an existing one. However, as with any loan, repaying it on time and in full is crucial to avoid hefty interest rates and penalties. If you are currently considering a bridging loan this quick guide will help you understand the most important aspects when paying a bridging loan, from managing your interest payments and potential exit routes we’ve got you covered.
How Does Bridging Loan Repayment Work?
Bridging loans are generally structured for short-term use, ranging from a few months to a maximum of 12-18 months. The repayment structure is different from that of a traditional mortgage, and it’s important to be clear on the terms before signing up.
Usually there are two types of bridging loans, closed bridging loans and open bridging loans. A closed bridging loan is when you have a fixed repayment date, if there is a definite timeline this type of bridging loan will most likely be used. An open bridging loan is the opposite, there is no set repayment date however the lenders will still expect the payment to be made within a certain amount of time, usually 12 months. Open loans come with a higher interest rate but are more flexible due to the repayment dates.
Repayment Options for a Bridging Loan
There are three main options for repaying a bridging loan, depending on your financial situation and the structure of the loan. It is important to be clear on the terms of the agreement as they are different to the terms of a traditional mortgage.
With the option of monthly interest payments you would be making monthly payments to cover the interest of the loan. Monthly interest payments are perfect if you have a reliable cash flow as it reduces the overall cost of the loan as you are paying the interest monthly. At the end of the loan term, you’ll be responsible for repaying the principal in full.
Retained Interest is another option, within a retained interest arrangement the interest for the whole bridging loan is calculated at the start and added on to the total loan amount. This means your monthly cash flow is unaffected, but the loan balance you need to repay will be larger when it comes due. Retained interest works well if you don’t want the burden of monthly payments but expect a large sum of money (such as proceeds from a property sale) to cover the loan at the end.
Rolled-up Interest is the perfect option for you if you want to keep cashflow free during the long period however it comes with the risk of higher repayment costs as interest compounds overtime. You do not pay interest during the loan period with Rolled-up interest, instead it is added to the loan principal at the end of the term.
What Happens If You Can’t Repay the Bridging Loan on Time?
Bridging loans are designed for short-term use, so repaying them on time is critical to avoid financial trouble. If you’re unable to repay the loan by the agreed date, you may face steep penalties, increased interest rates, and even the risk of losing your property or assets. In extreme cases, lenders may take legal action to recover the funds.
Repaying a bridging loan requires careful planning and a clear exit strategy. Whether you choose to repay the loan through monthly interest payments, retain interest, or roll it up, make sure you always consult with a financial advisor or mortgage broker to ensure the repayment plan you choose is right for you.
