When it comes to buying a property, choosing the right type of finance can be an important decision.
While mortgages are the traditional choice for most buyers, bridging loans can also be a good option in certain situations. Understanding the differences between them will help you decide which is better fit for your needs.
What Is The Difference Between A Bridging Loan And A Mortgage?
Although both bridging loans and mortgages are secured loans—meaning the borrower needs to put down an asset as collateral—they are designed for different purposes.
Bridging Loans are short-term loans, usually lasting less than 2 years. They’re designed to “bridge the gap” when funding a property purchase – usually when quick capital is needed.
Bridging loans are known for their fast approval times and more flexible criteria than traditional mortgages, making them better for time-sensitive property purchases.
Mortgages, on the other hand, are more long-term commitments. These loans involve monthly repayments and can last up to 40 years.
As highly regulated loans, mortgages are the go-to option for most property buyers, especially if they want stable, long-term financing.
When Should You Use A Bridging Loan?
Bridging loans are great for situations where buyers need speed and flexibility. Some common scenarios for bridging finance include:
Buying a new property before selling the existing one: If you’ve found your dream home but haven’t sold your current property, a bridging loan can provide the funds needed to make the purchase quickly.
Unmortgageable properties: If you’re looking to buy a property that doesn’t have facilities like a kitchen or bathroom, it may be considered “unmortgageable.” In this case, a bridging loan can be used to buy and refurbish the property before converting it to a mortgage.
Property auctions: Winning a property at auction means you need to pay in full, and fast. Sometimes, auction homes need to be funded within 28 days. Bridging loans can help you get the capital quickly, with time to apply for a mortgage at a later date.
At Blue Square Capital, we offer bridging loans with a 70% LTV, with funds released within 2 weeks.
Advantages Of Bridging Loans Over Mortgages
Bridging loans come with many advantages, including:
Speed: If everything is in order, a bridging loan can be arranged within 2 weeks, which is much quicker than the mortgage approval process.
Flexibility: Unlike traditional mortgages that are highly regulated and inflexible, bridging loans can be more flexible, which can be appealing to those with a bad credit history or no fixed income.
No Early Repayment Fees: As bridging loans are designed to be short term, there are usually no penalties for paying them off early, unlike with many mortgages.
The Benefits Of Mortgages Over Bridging Loans
Mortgages also come with their advantages, these include:
Lower interest rates: Because mortgages are repaid over a long period, the interest rates are usually lower. However, the overall payment may be higher, so make sure you assess them carefully to see if they are more cost-effective.
Longer repayment terms: Mortgages can be repaid over 15 to 30 years, so borrowers can spread the cost over an extended period.
Highly regulated: Mortgages are regulated by the FCA, meaning you have a good idea of what you’re signing up for before you apply. Though this does mean they are highly inflexible.
Choosing Between A Bridging Loan And A Mortgage
Choosing between a bridging loan and a mortgage depends on your financial situation. Here are some things to consider:
Speed: If you need quick access to funds and have a strong exit strategy, a bridging loan might be the best option. With approval times of under 2 weeks, they can be great tools for those needing capital quickly.
Risk: Bridging loans come with higher risks due to their short-term nature. If you prefer a more stable, long-term loan, a mortgage is a safer bet.
Exit strategy: If you are going for a bridging loan, make sure you have a clear plan to repay it. If part of that repayment plan is refinancing to a mortgage – that’s okay! These loans can absolutely be used together to help you reach your business goals.
How Do You Repay A Bridging Loan?
Bridging loans come with different repayment options:
Retained Interest: Interest is calculated and added to the loan upfront, which means no monthly payments.
Rolled-Up Interest: Interest builds over the loan and is paid in one lump sum at the end.
Serviced Interest: Monthly interest payments are made, similar to a mortgage.
Regardless of the option, the principal must be paid by the end of the term, which is where the exit strategy comes in.
Bridging Loans vs Mortgages: Which One Is Right For You?
Both bridging loans and mortgages have their place, but the right choice completely depends on your situation.
Bridging loans come with quick and flexible access to capital, making them great for short-term property projects or fast purchases. Mortgages, on the other hand, are best suited for long-term property ownership or investment, providing stability over time.
Contact Blue Square Capital today to apply for a bridging loan and access capital of up to £2,000,000 within 2 weeks.
