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Bridging Loan vs Mortgage: Which Is the Right Choice for You?
Bridging loans and mortgages are both primarily used for property purchases, but there are scenarios better suited to both types of property loan. The question is, which one would work best for you?
Both types of loans are known as “secured loans”. They both require collateral, an asset that you offer to guarantee the loan.
While many borrowers may already be familiar with a mortgage, they may not fully understand how bridge loans work. How do they compare to mortgages? What are the differences between the two? And when might a bridge loan serve a property transaction scenario far better than a mortgage?
In this guide, we’ll point you through the main differences between mortgages and bridge loans and, most importantly, which type of property finance would be suitable for you.
Written by: Sam Hodgson
Is a Bridging Loan the Same as a Mortgage?
While bridging loans and mortgages are similar in the sense that they are both large loans that can fund property purchases, they have a few key differences.
Bridging loans are short-term loans that allow borrowers to bridge a financial gap, while mortgages are long–term loans that can span up to 30 years and consist of monthly payments.
Mortgages are the default for property purchases, and they usually have cheaper interest rates, too.
So Why Might Someone Need a Bridging Loan?
Mortgages can have strict criteria to determine whether or not you’ll be able to afford your mortgage payments in the coming years.
- So, not only is the process of getting a mortgage more complex, but it generally takes a lot longer to secure a mortgage than a bridging loan.
- If you’ve found a property you want to buy and time is of the essence, a bridging loan could help you secure finance more quickly.
Fergus Allen
Head of Bridging
Let us do all the hard work of finding the right bridging lender for your circumstances.
We secure bridging finance for applications of all types, and we negotiate competitive lending to meet your needs and timescale.
With the help of a bridging finance broker, these funds can be accessed promptly. Sometimes within a week, depending on the complexity of the case.
Related: Remortgage After a Bridging Loan
Why Do People Use Bridging Loans Over Mortgages?
There are many many scenarios in which borrowers will prefer the short-term nature of a bridge loan. And in some cases, it may be impossible to take out a mortgage on a property. For instance, if the property doesn’t have a working kitchen or bathroom, it will be deemed ‘unmortgageable’.
- Typically, people also use bridge loans if they need to buy a new property before their existing property has sold. Bridge loans tend to be for those who need to act fast in a competitive market, whether it’s a residential purchase or an investment opportunity.
- The general rule of thumb is that you can secure the finance you need promptly, on the condition that you pay the loan back within the next 12 months, usually in a lump sum. This means that if you’re looking to flip a property or you’re downsizing, a bridging loan could be a suitable option.
And even if you’re not planning on selling a property to pay back your bridging loan, you may be able to convert to a mortgage once you’ve purchased the property.
As long as you can pay back your loan within the agreed terms, lenders tend to be less concerned with your credit history and income than they would with a mortgage.
For this reason, bridging loans can be quicker and easier to apply for than mortgages. However, this does depend on the loan, the amount, and the lender’s criteria.
What Are The Advantages of a Bridge Loan?
Bridge loans can be a great alternative to mortgages, and they offer various advantages given the right circumstances.
There are several benefits to financing through a bridge loan instead of a mortgage. They can be:
- Arranged quickly – a bridging loan broker could help you organise finance within a week, depending on the circumstance and complexity of the loan. Comparatively, a mortgage can take far longer to organise due to the underwriting process, legal processions, and a lender's checks to satisfy their own criteria – such as credit history, employment and income, etc.
- Flexible – if your circumstances are relatively straightforward, a standard mortgage with a high street lender could be the option for you. However, if you have more complex circumstances, the criteria of a high street lender may prove rigid and inflexible. Bridge loans are usually only provided by private lenders, which tend to offer greater flexibility when it comes to usage and purposes.
- In some cases, a cheaper alternative – Bridging loans usually have higher interest rates than mortgages, so mortgages often tend to be the cheaper option. However, because mortgages are spread out over such a long period of time, bridging loans may be able to be set up at a potentially lower cost than a mortgage. As well as this, there are no early repayment fees if the loan is repaid sooner rather than later.
- Can be easier to qualify for – Requirements can be less stringent, and bridging lenders can have looser criteria than mortgages. However, lenders can vary regarding criteria. One of our specialist brokers will be able to talk you through the terms of eligibility before you apply.
- Bridge loans give borrowers the means to act – They can offer you the option to access finance quickly in a competitive market. Which without this option can allow you to secure a dream residential property or investment opportunity that you may otherwise lose.
Watch our video below explaining the basics of bridging finance and how they can be used to fund a property purchase:
What Are The Risks of Bridging Loans?
With proper guidance and understanding at the outset, a bridge loan can be a far simpler solution and no riskier than any type of loan, as all types of loan pose some level of risk.
However, bridging loans tend to be paid back within a year, making the repayment term much shorter than with a mortgage.
- This is why it’s necessary to have a clear exit strategy when you apply for a bridging loan – to show that you understand the agreed terms and won’t struggle to pay back your loan within the agreed timeframe.
- This is perhaps the most important aspect of bridge finance. Lenders will determine whether you can repay the loan through your exit strategy, which can take many forms.
- Selling your old residential property, flipping and selling your property, or converting to a mortgage are all acceptable exit strategies that are used regularly.
- In most cases, this is a crucial underpinning for the affordability of the loan.
With the right advice and help, a bridge loan can be affordable. A specialist broker can ensure you’re on the right track and guide you through the process.
A specialist finance broker who understands your circumstances can determine whether a mortgage or bridging loan is suited to you and how to get the best possible deal.
Related: Are Bridging Loans a Good Idea?
What Is the Cost of a Bridge Loan Compared to a Mortgage?
Bridge loans are typically more expensive in the short term, as you’ll face some additional costs.
- These costs tend to come in the form of higher interest rates or additional fees – origination fees, valuation fees and underwriting fees, etc. which will be a percentage of the total loan amount.
- However, many factors can affect loan costs, and in terms of interest rates, a mortgage can also be expensive in the long run. So, it does come down to which option suits your current circumstances best.
You can find more information here about the specifics of bridging loan costs.
Bridging Loan Calculator
Our bridge loan calculator is a great way to get an initial quote or an idea of what you can expect to pay with bridge finance.
See the latest market news below.
2024 Bridging Market Update
The bridging market has had quite a transformation in the past few years. With rates starting at 0.55% per month, the costs aren’t dissimilar from those of a mortgage, and the combination of flexibility, quick turnaround time and less stringent eligibility criteria has led to bridging finance growing in popularity.
It’s now seen as a product in its own right instead of an expensive alternative to long-term finance.
Our finance brokers are seeing more repeat clients, particularly investors who have turned their attention to property flipping considering the slim profit margins the buy to let market has been seeing. HMO conversions have also grown in popularity amid more rigid rental legislation.
According to our team of advisers, a high volume of first-time borrowers already have an understanding of bridging loans before approaching us, showing that bridging is becoming more recognised in the industry.
As bridging finance becomes more mainstream, lenders are reviewing and reducing rates more frequently, offering more flexibility around costs.
How Do You Pay Back a Bridge Loan?
Bridge loans offer flexible repayment terms when compared to a mortgage repaid monthly and at a fixed or variable interest rate.
- Mortgages will have early-repayment charges as they are designed to be repaid over a long term, with calculated interest rates factored into a longer repayment period.
- Bridge loans are supposed to be repaid over a short-term period, typically 12 months. However, depending on your lender and the type of bridging loan you have, there could also be a certain level of flexibility.
- When it comes to interest, a borrower has the option to repay in a lump sum - either at the start of the term (retained interest) or at the end (rolled-up interest). They may even be able to pay interest as a monthly mortgage payment, similar to a mortgage.
Ultimately, the principal must be repaid by the end of the term, and a borrower repays this amount through their exit strategy, i.e., the sale of the property or refinancing.
If you are looking for more flexible options, a bridging loan broker can negotiate on your behalf and assess your circumstances to find the best option for you.
Need Advice Regarding a Mortgage or Bridging Loan?
When making any significant financial decision, such as a property loan, it's always best to seek the help of a specialist finance broker. This will ensure you're getting finance at an affordable and favourable rate.
Here at Clifton Private Finance, we can help you understand your options and decide whether a mortgage or bridging loan would be suitable for you.
We can use our network of lenders to give you an advantage in your application and search the market for the best options for you.
Call us today on 0117 959 5094 to see how we can help, or book a consultation with us below.
FAQs
Can You Get a Bridge Loan From a UK Bank, Like With a Mortgage?
While many are familiar with the mortgage products offered by UK banks, bridge loans are not so freely offered – in fact, high street banks no longer offer bridge loans at all.
Bridge loans are only available from specialist lenders and can be accessed easily through the help of a specialist finance broker.
How Much Deposit Do You Need For a Bridging Loan?
For a bridge loan, lenders can vary on deposit requirements – however, the majority will require equity, or a deposit, of around 25% to 40% when it comes to bridging finance.
Comparatively, a deposit for a mortgage will range similarly yet is typically only 5% to 10%, depending on the value of the property.
What Alternatives Are There to Bridging Loans?
There are many alternatives to bridge loans, not just mortgages. There are also personal loans, development finance, asset finance, invoice finance and many others.
