Guide to Property Finance
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12/2/2017 0 Comments Types of Bridging Loan InterestBridging finance has become an increasingly popular finance option among people and businesses. As the mortgage market is now said to only lend against properties that are habitable, most property developers believe that they would need to take a bridging loan to finance works on their properties. Due to this, the bridging loan market has expanded rapidly and so has the range of products. In this section of my article, I explain the three main types of interest plans a bridging loan can come with: Serviced interest
Serviced interest is said to work just like a regular mortgage or a loan that we normally come across with. The borrower simply makes monthly interest payments on the amount borrowed (interest only, not capital).However, in practice, serviced interest is the least used method of paying interest as bridging loan borrowers in general prefer to pay everything off at the end. Rolled up interest In rolled up interest, at the beginning of the loan the future interest payments are calculated and are simply added to the repayment amount. In other words, it means that borrowers do not have to make any monthly payments but pays everything off in one hit at the end. Let’s consider an example, if a borrower took out a £100,000 loan at 1 per cent for six months. Then, ignoring fees and charges, this would mean that they made no payments for six months and at the end they had £106,000 to repay. This method is usually preferred by most of the clients as no interest is charged on the interest. However, very few lenders offer this type of loan. Retained interest Similar to Rolled up interest, at the start of the loan the future interest payments are calculated and added to the loan. This means that the borrower has no monthly payments to make. The most important difference between retained interest and rolled up interest is that the interest rate is charged on the entire amount of capital and interest. Thus, you are bound to pay interest on interest. It may not surprise you to learn that this is the most popular method employed by Lenders and it is largely the market norm. This last method in particular has caused some controversy and comment from the FCA (financial conduct authority). If a bridging loan is advertised at a rate of, say 1 per cent per month, but this retained Interest model is used to calculate the payments, this affects the APR of the loan. In particular if the loan is on a regulated property (residential first charge) then there is an argument that the advertising of a loan at 1 per cent per month is inaccurate and/or misleading.
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