The bridging market is in an encouraging shape at the moment. Despite the recent general election and the uncertainty it brought, we have seen far more healthy activity levels compared with a year or so ago.
The most recent figures from the BDLA found that bridging loans hit a record high at the end of last year, and we have seen that momentum continue throughout 2024.
Equally, we’ve seen far more brokers taking the plunge into the market, realising the potential bridging loans hold for their client. Especially when borrowers need to move quickly to secure a deal or carry out refurbishments, before moving into more long-term financing, the benefits of a short-term loan are evident.
Rolled vs retained: Are your borrowers clued up?
One aspect of bridging loans that we find is often misunderstood by brokers new to short-term loans is the difference in the way that interest can be applied.
While the focus on the interest rate itself is usually high, the way that the interest is handled can have a significant impact on what the borrower ends up paying for their funding.
Some lenders offer their bridging loans with the interest retained, meaning the interest is deducted from the gross loan. While there is some consistency, in that the borrower knows the interest they are charged each month, this can work out more costly. The fact that fees are calculated off the gross loan means there is a further added expense to consider, too.
Things work rather differently when the interest is rolled, however. As the name suggests, the interest is rolled up, to be paid at the end of the loan. While it compounds each month, this means that the more quickly it is paid off, the better value it represents.
What’s more, as the fees are calculated on the net loan, rather than the gross loan, the borrower benefits from both lower fees and a higher loan available from day one.
How rolled interest can supercharge borrowing power
Some will question what difference this really makes to the end borrower, and it’s true that when the loans involved are relatively small sums, the variance in cost will be somewhat negligible.
However, as the loan becomes more significant in size, so too do the differences in the figures.
Let’s take the example of a borrower looking to take out a bridging loan at 75% LTV against a property worth £750,000, with a 2% arrangement fee and a 1% interest rate.
If they opt for a lender that uses rolled interest, as HTB does, then they will be able to obtain a loan of almost £489,500, compared with less than £484,000 on a retained basis.
In a market similar to the one we face currently – where things are tight, and every penny counts – for developers and investors to be able to achieve these higher loans on day one is a significant advantage.
That extra money could make all the difference in getting a purchase over the line, for example, or ensure that the investor is able to complete a refurbishment project to their satisfaction, securing the desired profit when they sell the property on again.
Similarly, for big ticket items these differences are substantial. At HTB we are seeing far more big-ticket business, such as developers making use of our development exit as they look to buy a little more time to complete a project successfully. For example, last year we completed a £7.5 million development exit facility, the sort of deal where being able to borrow on a rolled basis leaves the borrower many thousands of pounds better off.
Empowering brokers with the hidden secrets of bridging loan interest
It’s important to emphasise that this is not the fault of the brokers themselves, who have simply recognised how bridging products can serve their clients. As an industry, we don’t talk enough about the differences in the charging of interest and what impact that may have on the actual cost of the loan for clients.
The growth of the bridging market in recent years has been wonderful to see. Increasing numbers of brokers and their clients have come to recognise how bridging loans can support their projects, delivering fast funding that allows them to take advantage of investment opportunities as and when they arise.
But as an industry it’s vital that we provide intermediaries new to this sector with the tools they need to be successful, and core to that is developing a much deeper understanding of the potential differences in the treatment of interest.
Being armed with this information, no matter how small, can really help differentiate a broker from the pack if they’re able to educate their borrowers, ultimately building trust at the same time. Being aware of products available in the market is great, but educating brokers to ensure they can act in their borrower’s best interest must also be a priority.
Lorenzo Satchell is sales director for bridging at Hampshire Trust Bank
