Bridging Loans vs Mortgages, What Are the Main Differences?

Laura Broad[1]

Laura Broad

Money Savings Advice Bridging loans vs mortgages

Buying a property isn’t cheap. It’s not known for being a speedy process either, with many months typically passing between putting in an offer, having a mortgage approved and finally getting the keys in your hand.

Whats the Difference Between a Bridging Loan & Mortgage?

Bridging loans are short-term finance options that can be applied for quickly, compared to mortgages which are a lengthy process and have lower interest rates, but are designed to be repaid over a number of years.

You could find yourself in a situation where a bridging loan would take some of the pressure out of this process. This short-term finance option allows you to borrow money far more quickly than a mortgage, so you wouldn’t have to miss out if you needed to act quickly.

So which is right for you - a bridging loan or mortgage?

This guide looks at the key similarities and differences so you can decide for yourself.

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Similarities Between Bridging Loans and Mortgages

Even though bridging loans and mortgages are very different financial products, they do have some similar characteristics.

  • Secured finance. Mortgages and bridging loans are secured against a property. This means if you miss repayments, the lender may need to force a sale of your home to recover their losses. You could lose your home to repossession as a last resort.
  • How much you can borrow depends on the value of your property. Mortgages and bridging loans both work on LTV, or loan-to-value. This means how much you can borrow depends partly on how much the property it is secured against is worth.
  • Interest rates can be fixed or variable. Both mortgages and bridging loans offer a range of interest options and can be fixed, meaning the interest rate stays the same across the term of the loan, or variable, meaning the rate can go up or down.

Bridging Loan or Mortgage?

There are pros and cons of bridging loans just as there are with mortgages. Let’s look at how the two compare in a number of important categories.

Flexibility

Mortgage lenders are strict on what you can borrow money for. For example, there are usually restrictions on the condition of the building that put uninhabitable fixer-uppers and land purchases out of your reach when relying on a mortgage.

Bridging loans come with more flexibility. In theory, you can get a bridging loan for any type of property in any condition - including land, self-build projects and commercial properties. Some lenders might approve bridging finance for non-property related purposes too, given that you’re still willing to secure the loan against your home.

While a bridging loan does give you that flexibility, you need to be sure you can sell on your development project at the end of the term to pay off what you owe. And you need to be able to do this quickly - bridging loan terms are typically a maximum of two years long, compared to a mortgage which can have a term of 25 years or over.

Speed

Mortgages take time. It can often take weeks to even get an appointment to discuss your mortgage options with a high-street bank or building society, never mind the 4-6 weeks after that (on average) before your application is approved.

Bridging loans have a much faster application process. You can be approved and have the money ready to go within days if your application is straightforward enough. This means that if you need to make a quick purchase - a property at auction, for example - then a bridging loan is a quick way to borrow a significant sum of money.

Cost

As with all short-term finance, bridging loans are an expensive way to borrow. They tend to have much higher interest rates than mortgages due to lenders deeming them higher risk. Interest is also often added monthly - so even if you only borrow for a short amount of time, the interest can quickly add up. Bridging loans are also notorious for having high fees and extra charges attached, so be sure to check these before taking out any deal.

Borrowing With Bad Credit

Mortgage lenders are sticklers for proof of affordability. This means it can be tough to get approval for a mortgage if you’re on a lower income or have had issues paying back what you’ve borrowed in the past. Missed payments can stay on your file for six years too.

However, you could still be approved for a bridging loan even if you’ve got bad credit. Bridging loan lenders are more concerned about your exit plan. If you’re planning to sell your property to pay back the loan and its interest at the end of the term, the lender doesn’t have to worry about you meeting repayments in the same way that a mortgage lender would.

Paying Back What You Owe

With a bridging loan, there’s always the risk that you’ll be unable to repay the loan at the end of the term. If you’re banking on finding a buyer for your home, the sale has to be completed before you can pay off the loan - this might be tricky in such a short time frame. This could force you to rush into a quick sale and receive less than you’d like.

With the monthly repayments that come with a regular repayment mortgage, there is no such issue. As long as you can meet your repayments, you’ll chip away at your balance over time and it will always be paid off in full by the end of the mortgage term.

Bridging Loan or Mortgage: Which One Is Right for You?

To weigh up which is right for you and your situation, ask yourself the following questions:

  • Will I lose this opportunity if I have to wait for a mortgage to be approved?
  • Do I need finance for something a mortgage would not cover, e.g. land?
  • Am I unlikely to be approved for a mortgage with the credit score I have now?
  • Do I have a viable exit plan for how to pay off the loan at the end of the term?

If the answer is yes to these, then a bridging loan may be more suitable for you in the short term. Many people have both a bridging loan and a mortgage, with the loan providing the short-term bridge until longer-term finance can be secured, or the property can be sold.

As with all borrowing, always consider how the loan will be repaid before you take it out. Bridging loans are naturally risky - if anything goes wrong with the sales process or you have a buyer drop out before completion, you risk reaching the end of the loan term without an exit. At this point, you’ll have to rely on the mercy of your lender if you don’t already have an alternative refinance agreement already in place.

If you do plan to refinance onto a longer-term option such as a mortgage after the term of your bridging loan is up, always check that you’re likely to be accepted first. Where you can, try to get a mortgage agreed in principle before your bridging loan term comes to an end.

How Can Money Savings Advice Help You With Bridging Loans?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Bridging Loans brokers. They have already helped thousands of people get the best Bridging Loan deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

Laura Broad[1]

Laura Broad

Laura is a professional content writer and learning designer, passionate about empowering people through straightforward, jargon-free content. When she's not reading or writing about all things personal finance, you can find her in the gym, barbell in hand.

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