How is bridging loan interest calculated on commercial property?

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How do you calculate interest on a bridge loan?

The basic formula is simple: balance x monthly rate = interest for that month. For example, on an illustrative gross loan of £500,000 at a hypothetical 1 per cent a month:

• One month's interest: £500,000 x 1 per cent = £5,000.
• Six months (simple interest): £5,000 x 6 = £30,000.
• Twelve months (simple interest): £5,000 x 12 = £60,000.

Bridging is quoted monthly because loans are short and often repaid part way through the term. If you multiply a monthly rate by 12 you get a simple annual equivalent (1 per cent a month is 12 per cent a year on that basis), but that figure is only useful for comparison with longer-term borrowing. What matters is the total interest for the months you actually use.

Simple vs compound interest: what is the difference?

With simple interest, each month's interest is calculated on the original loan only. With compound interest, often used where interest is rolled up, each month's interest is added to the balance and the next month's interest is charged on that larger figure. The table uses the same illustrative £500,000 and hypothetical 1 per cent a month.

Month	Simple: balance charged	Simple: interest	Compound: balance charged	Compound: interest
1	£500,000	£5,000	£500,000	£5,000
2	£500,000	£5,000	£505,000	£5,050
3	£500,000	£5,000	£510,050	£5,101
4	£500,000	£5,000	£515,151	£5,152
5	£500,000	£5,000	£520,302	£5,203
6	£500,000	£5,000	£525,505	£5,255
Total		£30,000		about £30,760

Over 12 months, the illustrative compound figure rises to about £63,413 against £60,000 simple. The gap widens the longer the loan runs, so always ask whether rolled up interest compounds.

Is interest charged monthly or daily?

Lenders differ. Some charge whole months, so redeeming on the third day of a month still costs that full month. Others calculate interest daily once any minimum period has passed, which means you pay only for the days used.

A daily figure is usually worked out by converting the monthly rate to an annual one and dividing by 365. For example, on the illustrative £500,000 at a hypothetical 1 per cent a month:

• Annual equivalent: 1 per cent x 12 = 12 per cent.
• Daily interest: £500,000 x 12 per cent / 365 = about £164.38 a day.

On a short bridge, daily interest can save a meaningful sum, so it is worth comparing how each lender calculates it, not just the headline rate.

What balance is interest charged on: gross or net?

Interest is normally charged on the gross loan, which includes any arrangement fee added to the loan and any retained interest, not just the cash you receive. That is why the same monthly rate can produce different real costs depending on how the loan is structured.

For example, an illustrative gross loan of £500,000 with a 2% arrangement fee (£10,000) and 12 months of retained interest (£60,000) releases a net advance of £430,000. You pay £70,000 in interest and arrangement fee to receive £430,000 of usable cash. Our guide to commercial bridging loan LTV explains gross and net LTV, and retained vs rolled up interest compares the structures side by side.

How do minimum terms and early repayment affect interest?

Most bridging loans can be repaid early without a traditional early repayment charge, which is one reason they suit short projects. But many lenders set a minimum interest period, often a few months, so that the loan is worth arranging.

• For example, if the minimum period is 3 months and you repay after 2, you still pay 3 months of interest.
• With rolled up interest, repaying early simply stops interest accruing.
• With retained interest, many lenders refund the unused months after the minimum period, but some do not. Check the offer.
• With serviced interest, you have paid as you go, so only the capital is due.

Exit fees, where they apply, are payable whenever you repay, so include them in any early repayment calculation.

What is a typical interest rate on a bridging loan?

There is no single typical rate, which is why we do not publish one. Commercial bridging is priced per month, and the rate you are offered depends on how much risk the lender sees:

Factor	Tends to price better	Tends to price higher
Loan to value	Lower LTV	LTV near the lender's maximum
Property type	Standard offices, shops, industrial	Specialist, trading or vacant assets, land
Charge position	First charge	Second charge
Exit	Contracted or well evidenced	Uncertain or dependent on planning
Borrower	Experienced, clean credit history	First-time, adverse credit
Works	None or light refurbishment	Heavy refurbishment or conversion

A clear exit strategy and a lower LTV are the two levers most borrowers can influence directly.

How much would a 200k bridging loan cost in total?

Interest is only part of the cost. The table shows an illustrative total for a £200,000 bridge over 12 months at a hypothetical 1 per cent a month, simple interest. Valuation and legal costs vary by property and are shown as items to budget for rather than figures.

Cost item	Illustrative figure	How it is worked out
Interest	£24,000	£200,000 x 1 per cent x 12 months
Arrangement fee	£4,000	2% of £200,000
Valuation fee	Varies	Set by the valuer, depends on property and value
Legal fees	Varies	Your solicitor and the lender's solicitor
Exit fee	If applicable	Some lenders charge one, many do not

Repaying after 8 months instead of 12 would cut the illustrative interest to £16,000, provided the lender charges only for months used. Use our bridging cost calculator to model your own figures, and see our bridging loan fees guide for each charge.

How to compare bridging loan interest across offers

1. Confirm whether interest is simple or compound.
2. Check whether it is charged monthly or daily, and the minimum interest period.
3. Confirm the balance it is charged on, gross or net.
4. Ask whether unused retained interest is refunded.
5. Add every fee to get a total cost for your realistic term, not an optimistic one.

We set out these points for each lender on our panel so you can compare like with like. If your credit history is complicated, our guide to bridging with bad credit explains how that affects pricing.

Unregulated commercial and investment bridging is arranged directly. Any case where the security includes a home you or an immediate family member occupies, including a flat above commercial premises, may be regulated and is introduced to a firm directly authorised by the Financial Conduct Authority. We are not directly authorised by the Financial Conduct Authority ourselves. Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.