Bridging loans and mortgages are types of finance used to purchase property, by individuals, companies, landlords and property developers. But in which scenario is one better than the other?
A bridging loan is a short-term loan used to bridge the gap between the purchase of a new property until the sale goes through on an existing one. A mortgage is a long-term loan that covers the purchase of a property. Both are secured loans, i.e. require an asset(s) to be put up as security.
A residential mortgage is the most common form of secured loan and is perhaps more widely understood than a bridging loan. Bridging finance is an effective and efficient way to secure funds when buying a new property when a mortgage or a personal loan is not viable.
If you are weighing up your options and you’re not sure whether a bridging loan or a mortgage is right for you, please read our helpful blog.
For more detailed advice on how to get a bridging loan, contact Bridging Options, and we will put you in touch with an experienced broker.
9 things to know about bridging loans vs mortgages
1. Loan acceptance period
Bridge loans are a great way to raise funds quickly and with minimal paperwork. Funds can be available in a couple of weeks or even days. A mortgage, on the other hand, may take up to six weeks.
2. Loan term
A bridge loan is a short-term finance, with terms usually lasting no more than 12 months. Mortgages are long-term finance, generally taken over 15-30 years.
3. Interest rates
The interest rate on a bridge loan is a lot higher than a mortgage, typically around 1% per month, because its short-term nature is deemed higher risk. Interest is charged on a monthly basis but can be ‘rolled up’ and paid at the end of the term.
While interest rates are high on bridging loans, there are no early repayment charges as there are on mortgages.
4. Both are secured loans
Both a mortgage and bridge finance are forms of secured loan, meaning that you must have assets to secure against it, usually property. The lender will place a ‘charge’ on the security property, which will be released when the debt is repaid.
If the same asset is used to secure a further loan by a new lender, this is known as a ‘second charge’ loan. It is a legal agreement that dictates which lender is to be repaid first. In the case of a repossession, the first charge lender will redeem payment in full and the second charge lender from the funds remaining.
As with all secured loans, it is important to ensure you can meet the monthly repayments else your property is at risk.
5. Bridge loans have more flexible repayment options
You can choose from an open or closed bridge loan. Closed bridging loans have a fixed date to repay the loan, and open bridging loans, are just that – great if you haven’t found a buyer for your existing property.
A mortgage is a closed loan, and they tend to have strict terms and hefty penalties should you fail to keep up repayments. But bridging loans offer more freedom by offering multiple repayment options, such as interest-only payment plans or deferred payments.
6. A bridge loan is ideal for property developers
Property developers can really benefit from bridging loans to fund property purchases, refurbishments and new builds until such a time that funds become available. You can use bridge loans for all types of property, including residential and commercial.
Bridge loans are also common in auction finance, as traditional auctions require payment in full within 28 days.
7. Bridging loans require exit strategies
A bridging lender will require evidence of a robust exit strategy, i.e. how and when the loan will be repaid. For homeowners, repayment is normally made when a property is sold or when a mortgage is obtained. For developers, a valid exit strategy may be based on the sale of other properties or investments.
8. Bridging loans are not always as accessible as mortgages
Providing you fulfil the criteria, it is a relatively easy process to obtain a mortgage from a high street bank.
While some high street banks offer bridging loans, they can usually only be accessed by brokers. There are also specialist lenders who can offer high-value bridge loans, again, usually only available via a broker.
9. Loan criteria
Mortgage lenders will scrutinise your credit file, and any past bad credit may count against you. They will also require proof of your income.
When it comes to bridge loans, most lenders are less concerned with your credit score and income and more concerned with your solvency, property value and how you propose to repay the loan, i.e. your exit strategy.
Regardless of whether you decide to opt for a bridging loan or a mortgage, it’s important to research thoroughly and compare different lenders before signing any contracts. Before taking out a secured loan, ensure that you are able to comfortably meet the repayments, or you risk losing your collateral, which may be your home.
Why do people use bridging loans?
For homeowners, bridging loans provide a great solution to buy a new property while waiting for the sale of their existing home.
Bridging loans are also widely used by property development companies and landlords to purchase land and property. It allows them to be more flexible in securing deals, providing access to funds while they are waiting for other investments to pay off.
How much deposit do I need for a bridging loan?
Generally speaking, bridging loan lenders require a deposit of between 10-20% of the property’s value or purchase price. This is to provide reassurance that the borrower has enough funds to make the repayments on the loan.
If a borrower cannot provide a deposit, some lenders may be willing to accept other forms of collateral in order to secure the loan.
How much does a bridging loan cost?
When you borrow money via a bridge loan, it is important to remember that interest rates are high and to factor them into your exit strategy. There are also several fees to consider, such as arrangement fees, valuation fees, legal fees, broker fees and exit fees. These fees can be rolled up and added to your final monthly repayment.
Bridging Options can help you to secure the ideal bridge loan for your needs
At Bridging Options, we have access to a team of bridging finance experts who have access to a wide section of the bridging loan market, including both high-street banks and specialist lenders.
Your broker will assess your individual circumstances and goals before pinpointing the right lenders. They will guide you on the options, handle the bridging loan process on your behalf and secure your funds in a timely manner, sometimes in as little as a few days.
For fast, reliable bridging finance, contact Bridging Options by filling in our enquiry form, and we will put you in touch with a bridging loan expert as soon as possible.