When you take a bridging loan, usually it is for a short period of time and the interest rates can vary widely from one lender to another and also from product to product.

However, there are several actors that affect your interest rate. We have laid out a few tips here so that you can get the lowest possible interest for the bridging loan product that you choose.

Loan to value (LTV)

Loan to Value, or LTV is the ratio of the mortgage to the value of the property, expressed as a percentage.

The lesser your outstanding mortgage, the lower will be your LTV and you will have a better chance of getting a lower interest rate. This is because the lender will view a lower LTV as a better prospect to lend against.

Lender’s Legal Charge

The type of legal charge that the lender places over the property will also determine the rate of interest. Lenders will charge less interest if they can have first charge over the property.

Second charges are considered higher risk for lenders and they will consequently charge a higher rate of interest.

A very small number of lenders will consider a third charge, which in turn will have a much higher rate of interest.

Security Property

The property that the lender will lend against is known as the security property and it acts as collateral for the bridging loan.

Security properties can be of three types: residential, semi-commercial and commercial property.

Lenders prefer residential properties as security and charge the lowest interest rates for these, compared to the other 2 types of security property.

From the lender’s point of view, commercial properties pose the highest risk, so they charge higher interest rates if a bridging loan application is made for a commercial property.

Semi-commercial properties usually have flats above shops or restaurants. They are considered less of a risk that commercial properties, but more so that residential properties. 

State of Repair of the Security Property

A lot of bridging loan providers will accept loan applications where the security property would be considered unacceptable for high street lenders.

However, the catch is that loans on these properties will incur a higher interest rate.  

Location of the security property

Location also plays an important part in determining interest rates. If the security property is in or around London, it will incur a lower interest rate, as there is more of a competition between lenders who are willing to lend. Indeed, there are many bridging loan providers who will only lend on properties in London.

Security properties farther away from London will usually be eligible for bridging loan products which have a higher rate of interest.

Affordability of the Borrower

A Lender will always assess the borrower’s income and outgoings to evaluate their ability to meet the monthly mortgage payments. This is known as the affordability check. The better the borrower’s affordability, the lower interest rates they are likely to get on a bridging loan product.

Term of the Loan

The term of the loan is the duration that the money is borrowed for and this will affect the interest rate. Most bridging lenders have a maximum term of 12 months and any loan beyond this term will charge a higher rate of interest.

Credit history of the Borrower

Bridging loan lenders like applicants who have a good credit history. Lenders will also accept borrowers with bad credit histories, County Court Judgements, credit and mortgage arrears, defaults and IVAs, but this will mean a considerably higher rate of interest on the loan.

Lender’s supply of Funds

Lender’s availability of funds will also affect the interest rates handed out to the borrowers. When the lender is has an abundance of funds, the interest rates are low and vice versa.