How is interest paid on a land bridging loan?

Serviced Interest or Deducted interest

In a serviced interest arrangement, the borrower pays the interest monthly, similar to a standard mortgage. This option can be beneficial if the borrower has a regular income stream and prefers to manage their cash flow by paying interest as they go. It helps in maintaining the principal amount of the loan, as the borrower is actively paying off the interest. Borrowers need to ensure they have the necessary cash flow to make these monthly interest payments. It’s essential to plan for these expenses to avoid financial strain.

In deducted or retained interest loans, the interest for the loan term is calculated upfront and deducted from the initial loan amount provided to the borrower. This approach is useful for borrowers who may not have a regular income stream during the term of the bridging loan, such as property developers awaiting sale or refinancing of a project. It eliminates the need for monthly interest payments, as the interest is already accounted for. Since the interest is deducted at the beginning, the initial cash received by the borrower is less than the total loan amount. Borrowers should plan accordingly, as they will have less capital available upfront for their project or investment. It should be noted that any interest unused will usually be repaid by the lender on exit.

Both options have their specific uses depending on the borrower’s financial situation, cash flow, and strategy for the loan. It’s crucial for borrowers to understand these differences and choose the option that best aligns with their financial plan and the intended use of the land bridging loan.