Could a quick, short-term financial solution jeopardise your long-term homeownership goals? We’re exploring whether or not a bridging loan can affect your mortgage application.
Bridging loans can be a valuable tool for navigating a range of property transactions. However, if you’re considering applying for a mortgage simultaneously, you might be wondering if a bridging loan will affect your mortgage application.
While these short-term loans offer flexibility and speed, they can also raise concerns for mortgage lenders. In this article, we'll look at the ways in which bridging loans can impact mortgages, exploring how they interact and what factors lenders consider when assessing your financial situation.
Bridging loans are short-term funding that can be arranged quickly and used for transactions that traditional finance, such as a mortgage, cannot facilitate.
They often bridge the gap between buying and selling a property, such as in the event of a chain break. Other common scenarios where bridging loans are used:
Bridging loans can be regulated or unregulated. If the bridging loan is used to purchase or refinance a property that you, or your immediate family, will live in, the loan will be regulated.
Find everything you need to know about unregulated vs. regulated bridging loans.
Bridging loans are intended for short-term use only. Regulated bridging loans typically have a maximum term of 12 months, while unregulated loans can be up to 24 months (on Brickflow, some lenders offer terms up to 60 months in some circumstances).
Unlike a mortgage, which amortises over decades, bridging loans are paid back in full at the end of the loan, plus interest.
Bridging loans can be used as a solution to fund a quick fix and flip property, which is repaid by selling the renovated property. Or they can be a temporary solution repaid in full when longer-term finance (a mortgage) can be arranged, or liquidity from elsewhere can be used.
The most common example is buying a new home with a bridging loan before securing the proceeds of your current home. The sale may cover the entire bridging loan, or it can be repaid by refinancing the new property with a residential mortgage.
Investors can also buy and renovate a property using a bridging loan and refinance the completed project onto a buy-to-let mortgage. In this case, the BTL mortgage repays the bridging loan.
For commercial properties, the bridging loan can be refinanced using a commercial mortgage.
Does a bridging loan affect your mortgage application? The short answer is yes and no. It depends on your specific situation.
Here, we discuss some key issues of when or how a bridging loan can affect your mortgage application:
Bridging loan lenders run credit checks before arranging a loan. Each time a new credit check is run on any borrower, it can impact credit scores.
Also, if you have defaulted on a bridging loan debt, this will adversely affect your credit score, and lenders will be concerned about your ability to keep up with mortgage payments. Naturally, this makes it more challenging to secure a mortgage.
Having poor credit can affect your ability to secure a mortgage, but it is less significant when applying for a bridging loan. This is because bridging lenders are primarily concerned with the exit strategy.
The debt-to-income ratio is the proportion of your income that goes, or will go, towards debt repayments. If you have an outstanding bridging loan that is serviced (paid monthly), this will impact affordability calculations for arranging a mortgage, limiting the amount you can borrow.
It might also mean you will pay higher interest rates.
However, serviced bridging loans are not that common and instead are typically repaid in full at the end of the term, with interest rolled up and added on (or deducted from the initial gross loan from the outset). Mortgage lenders will assess your exit strategy for the bridge loan to determine the level of risk involved.
Lenders all have different lending limitations and criteria, and some will accept a higher level of risk than others.
To assess a mortgage application from a borrower with an outstanding bridging loan, mortgage lenders will evaluate:
While a bridging loan may not automatically disqualify you from a mortgage, it can impact the outcome of your application. Potential consequences include:
To mitigate these risks, it's crucial to work closely with a mortgage broker who can help you navigate the complexities of the mortgage market and present your case effectively.
There are many property transactions where bridging loans are more suitable than a mortgage.
Bridging loans can be organised in a matter of days (in some instances), have flexible terms such as no early repayment charges, and be secured against various property types.
Key examples of when a bridging loan would be used rather than a mortgage:
The lending criteria for mortgages and bridging loans naturally have some commonality, with both loan applications involving lender due diligence on:
The key differences, however, are how lenders determine your ability to repay your loan.
Bridging loan lenders need to see a viable exit strategy, whether it's a refinance, sale of the property or liquidation of another asset. Mortgage lenders must see that you can afford the monthly mortgage repayments, considering all your income and outgoings.
Bridging loan lenders focus more on the property's value, the project if applicable, and its short-term viability. Mortgage lenders, on the other hand, assess long-term financial stability.
If you’re considering taking a bridging loan for property investment and also need to secure a mortgage, there are steps you can take to minimise the effect on your application.
Brickflow is a great resource for understanding bridging loans and learning how and when they are used. Our guides on bridging loan criteria, bridging loans vs mortgages and bridging loans used to buy a house explain the fundamentals of buying a property with a bridging loan and how it differs from mortgage funding.
However, the best resource any property investor can use is Brickflow’s bridging loan calculator.
Brickflow’s bridging loan calculator gives you instant access to live loans from over 100 specialist lenders, enabling you to know actual borrowing costs and loan amounts before committing to a property purchase.
It offers you the most comprehensive financial due diligence in under 60 seconds.
Here’s how it works:
In conclusion, understanding how a bridging loan can influence your mortgage application is crucial. Factors such as credit checks, debt-to-income ratios, and lender risk assessments can all be impacted by an outstanding bridging loan.
However, with careful planning, transparency, and a clear exit strategy, you can minimise these risks and increase your chances of securing a mortgage.
Brickflow’s bridging loan calculator enables you to instantly search and compare live bridging loans from across the breadth of the market. Before committing to any property investment, run your numbers, model your deals, and check whether they are actually viable against live borrowing costs.
You’ll never waste time pursuing unviable projects again.
Applying for a bridging loan can impact your credit score. This is because lenders will typically perform a credit check to assess your creditworthiness.
However, the impact can be minimised by ensuring you have a clear exit strategy and repay the loan on time. In this case, the bridging loan can potentially improve your credit score. Conversely, failure to repay the loan can negatively impact your score.
Many experienced investors regularly use bridging loans, and they offer flexible solutions for many situations, but it's important to be aware of potential drawbacks:
Understanding how bridging loans work is vital.
Securing a bridging loan can be less challenging than obtaining a traditional mortgage.
Lenders are looking for a solid exit strategy first and foremost, so borrowers with bad credit or low income can still potentially secure a bridging loan (though possibly with less favourable rates).
Working with a specialist broker can help you navigate the process and increase your chances of approval.