Bridging Loans And Mortgages: What's The Difference?

Bridging Loans And Mortgages: What’s The Difference?

There are two types of finance available for purchasing property - bridging loans and mortgages. 

How do bridging loans and mortgages compare?

Traditional finance, such as mortgages, can be static and inflexible – typically spanning a long term (5-30 years) with low-interest rates, to be paid off through regular monthly instalments. 

Conversely, bridging finance can offer the opposite with financing over a shorter term (typically 12 months), with more expensive interest rates. 

Bridging finance can raise a large amount of capital, enabling borrowers to act on a house purchase – effectively making you a cash buyer, which is a favourable position when facing a competitive market. 

Overall, bridging loans are used to “bridge the gap” as a short-term financing option – yet, because of their flexibility, they can apply to several scenarios that traditional finance does not support.

A bridging loan can be used when traditional finance isn’t an option

Typically, mortgages are used for residential property as traditional finance can be impossible to secure if the property is in disrepair or not up to a standard, liveable condition. 

Alternatively, bridging finance is beneficial to both home buyers and investors or developers - it can also be used for a variety of purposes besides just financing residential properties:

• Buying land/development sites – attempting to buy land for property development purposes. 

• Build-to-let projects – Bridging allows for swifter property development, as they can cover building costs on time-sensitive commercial ventures.

• Auctioned properties – properties acquired in auctions must be paid for within 28 days. A bridging loan resolves a time-sensitive deal where traditional finance cannot. 

• Self-build projects – prospective builds may be unmortgageable. With a bridging loan, any property project can be financed without delays.

• Unmortgageable property – any property currently at an uninhabitable standard, lacking a working bathroom or kitchen facilities, will be ineligible for a standard mortgage – a bridging loan can be the solution to financing these types of properties.

• Refurbishment – You can use a bridging loan to refurbish or renovate a home you’re looking to sell – which can significantly improve its chances of being bought. 

Interest rates are handled differently

Bridging loan lenders will usually charge high monthly interest rates due to the loan spanning a shorter term. 

However, the outstanding interest can be “rolled-up” and paid at the end of the term instead of monthly. Moreover, there are no early repayment fees with bridging finance, whereas mortgage interest must be paid over the entire duration.

Unlike a mortgage, a bridging loan can be set at rates of 1-1.5% per month, as opposed to the average of 5% annually. In addition, lenders will not set an annual rate, as a short-term loan is typically paid off within months. 

Interest rates will depend on the lender's criteria and reflect the security you offer and your circumstances.

In what ways can the application process differ?

Strict criteria will underwrite traditional mortgages – lenders will require evidence that you can repay a long-term commitment. They will probe your credit history and personal income and look for relevant information through stringent checks.

Comparatively, applying for bridging finance is a simplified process. Lenders are chiefly concerned with the security offered and your ability to repay the loan through a solid exit strategy – a poor credit history will not diminish your chances of securing fast financing. 

Additionally, bridging loans can be secured with an appropriate asset or multiple securities (usually property), and you can borrow a large amount of capital at a favourable rate.

The application process for a traditional mortgage can move sluggishly - typically taking several weeks. However, a bridging loan can be secured within days. 

It is essential to consider your exit strategy

While bridging loans offer a short-term solution, you must have a good payment plan in place. 

You can use a bridge loan calculator to get an initial, indicative quote – which will give you an idea of the overall cost. Also, there are additional fees to consider, such as valuation and broker fees.

Our specialist brokers can provide the best bridging loan available 

We deal with clients regularly who require a fast alternative to traditional finance. We can get you a quote and find a suitable lender for your circumstance. 

Do not hesitate to contact our team when traditional finance is not an option and you need a quick, reliable solution from experienced brokers.