Rolled up Interest for Bridging Loan or serviced Interest how they work
If you are looking to take out bridging Loan one of the main decisions is whether to have rolled up interest or service payments. The choice between rolled up interest or service payments runs to the heart of the profitability and cash-flow of your project.
In this article I explore the main differences between rolled up interest and service payments to help you make the decision that suits you for your bridging finance. It is also in your best interests to seek the advice of a professional finance broker, such as Niche Advice.
If you are to choose rolled up interest the amount that will be advanced to you on day 1 to undertake your project will be reduced as the equivalent interest payments to service the loan over the term will be taken up front, and common bridges run for 6 months to 12 months so that can be a significant chunk particularly on large projects.
Your status becomes less important on rolled up interest as the lender does not need to know you are good for the repayment of the interest payments as they have already been taken.
If you take a rolled up interest bridge and you repay the bridge before the term ends the interest payable on the unused term will normally be repaid, for example if you take a 12 month bridge and repay after 9 months normally an amount equivalent to 3 months payments will be refunded.
The choice of rolled up interest or service payments will not necessarily improve your exit routes but it follows that if you are looking to remortgage the debt that the transition to a mortgage may be easier for you as you’ll be used to servicing payments (and normally at a higher price), and your qualification for a mortgage may be more assured as you have already passed through bridging underwriting process.
Table 1: Main differences between rolled up interest and service payments.
| Rolled Up Interest | Serviced Payments | |
|---|---|---|
| Net amount advanced day 1 | Less | More |
| Occupation and income | Less important | More important |
| Past credit history | Less important | More important |
| Supporting documentation | Less | More |
| Underwriting | Less important | Less important |
| Speed of process | Faster | Less fast |
| Does experience count | Same | Yes |
| Does it improve your exit choices | No | No |
Table 2: Net loan. Example of the amount released between rolled up interest on day 1.
Based on a property value of £150,000. Gross bridging loan £112,500 (75%LTV).
Interest rate 0.85%pcm. Lender arrangement fee 2% and insurance fee £150. CHAPs fee £25.
| Serviced Interest | Rolled up 3 month Interest | Rolled up 6 month Interest | Rolled up 12 month Interest | |
|---|---|---|---|---|
| Amount released on day 1 | £110,075 | £107,206 | £104,337 | £98,600 |
So draw a conclusion here the service payments has the advantage of £11,475 over a 12 month bridge to use day 1 on the project. This money upfront could be used to increase your labour and get the project completed quicker or for instance a refurb of kitchen, bathroom and set of windows.
Niche Advice offers bridging loans to those in need to purchase a property quickly.
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