Borrower Tips
You’ve found a great investment property; a diamond in the rough with huge potential - but it needs some work. Do you try the traditional mortgage route, or is there a faster, more efficient way to unlock the opportunity?
You’ve found a great investment property; a diamond in the rough with huge potential - but it needs some work. Do you try the traditional mortgage route, or is there a faster, more efficient way to unlock the opportunity?
As bridging loan books reached a record high of £8.1 billion earlier this year, we examine bridging loans vs mortgages: when to use each loan, their pros and cons and how to decide what’s right for your property investment.
A bridging loan is a short-term loan that can facilitate a wide range of property transactions, including commercial, residential and mixed-use properties. They are often used to bridge the gap between buying and selling or refinancing a property.
Bridging finance is flexible, fast to arrange and typically has loan terms between 1 and 24 months.
Bridging loans are secured against the property being financed or other assets/properties. This means the lender accepts your assets as collateral and can take possession in the event of a default.
Approval primarily hinges on your exit plan. A clear exit strategy (like a completion date for a sale or mortgage pre-approval if refinancing) can help you secure better rates and terms, and would typically be a ‘closed bridging loan’.
An ‘open bridging loan’, where you have multiple viable exit strategies and intend to decide closer to loan redemption, will likely carry higher rates than a closed bridging loan.
Interest is rolled up and paid at the end, but it is compounded, meaning you pay interest on the interest. It's typically charged daily, so you only pay for the period you have the loan but there can be early repayment charges if you exit before reaching the minimum agreed term. Some lenders charge for a full month even if you exit the loan part-way through.
A mortgage is a long-term finance solution that is repaid in monthly instalments. They can span over 30+ years and allow property investment with a relatively small capital contribution.
The most common use of a mortgage is purchasing a residential property to live in. For property investment, there are mortgage solutions like buy-to-let mortgages for residential landlords and commercial mortgages for commercial landlords or owner-occupied business premises.
Use Brickflow’s commercial mortgage calculator to compare rates and fees.
A mortgage amortises (is gradually paid off) over the agreed term, with monthly payments of interest and capital. Alternatively, a mortgage can be interest only, which offers lower monthly payments but does not reduce the debt, so at the end of the term the borrower still owes the full loan amount.
They are income-assessed to determine if you can afford the monthly repayments, and lenders will ‘stress test’, meaning they assess affordability against a hypothetically higher rate. Poor credit history can impact your ability to secure a mortgage.
Mortgages require a deposit contribution, with minimum requirements varying. First-time buyer initiatives often see deposit requirements as low as 5%. However, lenders will typically require 10% as a minimum.
Buy-to-let (BTL) and commercial mortgages generally require a minimum of 25%.
|
Bridging Loan |
Mortgage |
|
|
Loan term |
Typically up to 24 months |
Up to 35 years |
|
Security |
The property or other assets |
The property being purchased |
|
Interest |
Rolled-up and paid on exiting the loan |
Paid monthly |
|
Loan Repayment |
Repaid in a lump sum of the original loan plus interest and fees |
Amortised over the mortgage term |
|
Application & approval timeline |
In certain circumstances, loan approval can be within a few days |
Up to 10 weeks |
Bridging loans typically have a faster application process, with lenders primarily concerned with property and asset valuations, and the exit strategy.
Documentation and approval times
At Brickflow, you could have a Decision in Principle for a bridging loan within minutes of applying.
Loan approval typically takes 2 weeks on unregulated loans. In some circumstances, lenders can use an Automated Valuation Model (or desktop valuation) and opt for title insurance, meaning no property searches are required, so approval can be a matter of days.
Unregulated bridging loans can be used on commercial properties or residential investment properties. Regulated bridging loans are used when the borrower or their family will live in the property, and completion is slower, usually between 4 - 6 weeks.
For any bridging loan, you'll need to present the lender with:
Mortgages require a more extensive application, involving credit checks and income assessment to determine the borrower’s ability to meet monthly repayments. As mentioned, residential mortgage lenders stress-test a borrower’s ability to pay a hypothetical rate increase, which varies but around 5%-7% above the lender's standard variable rate is common.
Commercial mortgage lenders don’t always carry out stress testing on 5-year fixed products, and focus on interest coverage ratios (ICR). On 2-year fixed mortgages, lenders stress test at varying percentages above the mortgage.
Documentation and approval times
It typically takes 4 weeks or more to receive a formal mortgage offer, with completion taking another 4 weeks after this. As with any financial arrangement, it can be longer, especially where any complexities arise. Paperwork typically includes:
Bridging loans have higher interest rates to compensate for their short-term, higher-risk nature. Almost all bridging loans will have arrangement fees, typically around 2% that can be paid upfront or added to the loan. Most bridging lenders don’t charge exit fees after an agreed minimum term has passed, such as 3 or 6 months.
You will also have to pay:
Find out more about the costs involved in How Much Does a Bridging Loan Cost?
Mortgages generally have lower interest rates than bridging loans and some lenders offer borrower incentives, such as no arrangement (product) fees, or legal fees covered.
Consider the overall deal though, as no-fee mortgages often come with higher rates, whilst lower rates help push a lender up the comparison table, but often carry higher arrangement fees. The fees can be paid upfront or added to the mortgage.
You will also have to pay:
Bridging loans have higher rates and fees than a mortgage, but over the long term you will typically repay more overall in a long term mortgage than a short-term bridging loan.
Short-term, ranging from 1 month to 24 (some bridging lenders on Brickflow can offer terms up to 36 or 60 months). Most commonly paid in full at the end of the term, with interest added, but it is also possible to service the debt monthly. In this case, income and affordability checks would be carried out.
Long-term borrowing, up to 35 years, with 25 years being the most commonly arranged mortgage. The debt is repaid monthly and amortised over the mortgage period. Monthly payments are made up of capital and interest, or in some cases interest only, in which case the debt isn’t reduced.
Pros:
Cons:
Bridging loans can be more affordable than you might think. Brickflow’s bridging comparison tool instantly tells you what you can borrow and how much it will cost.
Read more in What are the Pros and Cons of a Bridging Loan?
Pros:
Cons:
Choosing between a bridging loan and a mortgage depends on your intentions for the property and your financial situation.
Both loan types have certain circumstances they are ideally suited to:
Bridging loans: A short-term solution
Mortgages: A long-term investment
When deciding between a bridging loan vs a mortgage, it’s key to decide your investment goals and timeline.
Finance makes or breaks deals, so knowing your numbers before pursuing a project is essential.
At Brickflow, you can instantly search and compare bridging loans from across the entire market, including banks, non-banks and specialist lenders, to see how your deal stacks against actual borrowing options.
Your circumstances will determine whether a bridging loan or mortgage is better suited to your requirements, but a specialist property finance broker can help. If you’d like to apply for bridging finance through Brickflow, we can connect you with any of our broker partners, who will facilitate and manage your application process.
While both bridging loans and mortgages can finance property purchases, we’ve explored scenarios where each option is best suited, helping you decide which is the right choice for you.
Smart developers and investors consider their funding options first and foremost, on every property transaction. Brickflow offers you tech-powered financial due diligence in under 60 seconds, so you can be sure your project is viable and that you’ve found the best deal available.
Mortgages are intended for long-term borrowing, where the debt amortises over a 20 - 35-year period. They are assessed against borrower affordability.
Bridging loans are short-term funding solutions, typically up to 24 months, that facilitate fast property transactions or other unmortgageable property purchases. They are arranged based on the exit strategy.
Yes, a common exit strategy for bridging loans is refinancing the property with a long-term mortgage. Having a mortgage agreement in principle can make securing a bridging loan easier.
Unpicking the pros and cons of an open-ended bridging loan, the difference between open and closed bridging and what is the best choice loan for you.
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A quick look into some of the key differences between commercial and residential bridging loans, and other variations of bridging finance.