ABC FinanceBridging loansAlternatives

Alternatives To Bridging Loans

Find out the key alternative types of borrowing and how they could be used to meet your finance requirements

Author: Gary Hemming CeMAP CeFA CeRGI CSP

20+ years experience in bridging loans

Securing borrowing against your property is a big decision and it’s crucial that you choose the most suitable product for your needs. Bridging loans are a useful tool to have at your disposal; however, with a vast range of financial products available it is good to know about other options that might be more suitable for your circumstances.

Find out the alternative types of borrowing and how they could be used to meet your finance requirements.

What is a bridging loan?

Bridging loans are short-term loans that  are secured against property. They originated in the residential market as a niche product although have become a popular choice for commercial  property investors and developers. 

A reduction in  bridging finance costs and rising standards in the industry have contributed to the change in attitudes towards this type of loan that is now offered by a vast range of lenders.

These loans are usually arranged for between 1-18 months, with the interest often being added to the loan, meaning there are no monthly payments to make.

When bridging loans are repaid early, there aren’t usually any exit penalties to pay, making them a cost-effective borrowing tool for short-term requirements.  It is worth noting that bridging loan interest rates are higher than those associated with some of the alternatives that we will be covering later in this article.

As with any borrowing, it’s important that you consider the total costs of borrowing and how you will pay back the loan before committing to an agreement.

Bridging Loans by ABC Finance

FIBA Member
ABC Finance Reviews

When would a bridging loan be appropriate?

Bridging loans suit a number of purposes, including completing a property purchase quickly, financing property refurbishments, paying off outstanding arrears whilst arranging a new deal, and buying a property before selling your existing one.

They are used by both property investors and homeowners to fund urgent, unusual or profitable financial transactions. Bridging loans for property developers can generate significant profits by allowing the developer to take on larger projects. They’re a relatively bespoke product and designed to be flexible, so the reality is that there is no ‘one size fits all’ reason for taking out a bridging loan.

Lenders will want to see a firm reason for taking out a loan and a clear exit strategy, however, are well-used to arranging finance for a diverse range of lenders. Using a specialist broker who understands your needs will help match you with a lender who has experience in providing bridging loans.

Why a bridging loan is not always the right option

Bridging loans can be a useful form of short-term finance, however, in some circumstances other types of financial product may be better suited to your needs. Whilst bridging loans offer a great deal of flexibility they carry higher costs, a range of fees and require property as collateral for the loan.

If you don’t have a definite and short-term end date for your funding requirements then it’s advisable to think carefully about your options; bridging loans are designed for short repayment periods and lenders will expect clarity on an exit plan.

What are the alternatives to bridging loans?

There are a range of alternative options to consider when looking for a loan. It’s recommended you speak to a specialist broker about your requirements so they can advise on the types of product, and lenders, that suit your circumstances.

Here we explore some of the most common alternatives to a bridging loan:

Mortgages

A mortgage is a long term loan secured on property. A bridging loan is not a type of mortgage although both products have similarities as they use property as collateral.

Mortgages are more appropriate for longer term needs and tend to come with lower interest rates, whereas bridging loans are short term arrangements. It is unlikely you would be able to get a mortgage on a property that needed substantial work or development, whereas bridging loans can be used for development purposes.

For a detailed breakdown, read our guide to bridging loans vs mortgages.

Buy-to-let mortgage

A buy-to-let mortgage is a loan is a type of finance used to purchase rental properties that will be let out to paying tenants. This type of mortgage typically has longer repayment terms than bridging loans and lower interest rates. 

The benefit of a buy-to-let mortgage is there is no need to sell your existing property to secure the loan, and the income from tenants will cover mortgage repayments on your investment. 

Remortgaging and equity

Remortgaging is a popular option and this involves switching to a new lender or renegotiating the terms of your loan with your existing lender.  

In some cases, the value of your property will have increased since you took the original mortgage giving you more equity, which is the amount your house is worth minus the amount you owe. Increasing your equity means that your mortgage lender may allow you to borrow more. Even if the value of your property hasn’t changed, it is worth discussing options with your mortgage lender as they may be able to offer some flexibility and potential options for you as an existing customer.

The main benefits of remortgaging, rather than taking a bridging loan, are lower interest fees and the ability to access significant funding over a longer period of time. Often arranging a mortgage is not a speedy process and so if you are looking for a very quick turnaround then the timescales involved can be a disadvantage.

For example, if you are a property investor and have purchased a house at auction you will have a short time to complete the sale and securing a mortgage is unlikely to be a suitable option.

Second-charge mortgage

A second-charge mortgage is a loan secured on your property, it is separate from your main, or first, mortgage and funds are provided by a different lender.  As your property is used as collateral if you default on either mortgage your home could be repossessed.

Equity is important for a second-charge mortgage as lenders will want to make sure that if you defaulted on payments the sale of your property would cover both mortgages.

Taking a second loan on your home has advantages and disadvantages. The advantage being that you can often take a substantial loan with longer payment terms and flexibility on what it can be used for. There is no need to change your original mortgage in this scenario, however, you will need to seek permission from your primary mortgage provider to use your property as collateral. 

Interest rates can be variable and will depend on your financial history. It is recommended that you seek independent legal advice before securing any debt against your home.

Equity release mortgages

Equity release mortgages are often synonymous with people of retirement age and you will need to be aged over 55 to qualify for this option.  This financial product allows homeowners to borrow money against the value of the property and continue to live in the property until it is sold. When the property is sold the loan will be repaid with interest.

A lender will buy your property and then provide you with a ‘lifetime tenancy’ allowing you to remain in your house  until it is sold, either because the owners have died or move into long-term care.

A cautious approach is advisable when considering equity release. The benefit of remaining in your home whilst accessing funds needs to be considered alongside the terms of the arrangement, often the amount offered to buy your property is much lower than its market value.  Interest accrues on the loan over time, and so the earlier you take equity release then the more interest the lender will take when the home is eventually sold. 

Commercial mortgages

Commercial mortgages are a long-term financial product, with repayment terms up to 25 years, secured on a property that is not where you live.

Ordinarily commercial mortgage rates will be significantly lower than bridging loan rates, however, if you do decide to pay a mortgage back earlier than agreed there may be early repayment fees. If you would like the flexibility to pay your mortgage back earlier, or overpay, then speak to your mortgage broker to match you with a lender that offers early repayment options. 

Interest payments on commercial mortgages are tax deductible and so this can help reduce taxable income and, in turn, liabilities. 

Asset Loans

Asset loans describe a category of financial products and services that help businesses and individuals secure funding based on the value of their assets. Using assets as collateral negates the need for using property.

Often businesses use asset loans to buy or lease machinery and equipment needed for their operations. The lender provides the money upfront and the business pays the loan back over time in smaller, more manageable amounts.

A key benefit of this type of financing is that it preserves business cash flow, which is crucial for a variety of purposes such as investments, unexpected bills or tax liabilities. 

Personal or small business loans

Small business loans are one of the main finance options used by startups and small businesses. This type of loan is quite straightforward with funding provided by a lender, often a mainstream bank, that is paid back over an agreed period with interest. 

Unsecured and secured loans

Unsecured loans are a type of credit that isn’t based on assets such as property or stock. Lenders will assess the creditworthiness of a business and the likelihood that they will be able to pay back the loan. Unsecured loans are often shorter term arrangements.

This type of loan is considered to be higher risk as the lender does not have certainty the payments could be met, or that they will receive their money if the business defaults on the arrangement. Unsecured loans ordinarily have higher interest rates than secured loans.

Secured business loans are based on assets or ‘collateral’ so the lender will have confidence that monies can be recouped if the business defaults on payments. Often assets such as property, or merchandise are used to secure loans.

Interest rates on secured loans are often lower as there is a guarantee that the lender will get their money back; however, with long term secured loans interest rates can be higher as a lender is tying up funds for a long period.

Invoice finance and factoring

Invoice finance and factoring allows you to use your outstanding invoices to secure financing, typically 80-90% of monies due. Factoring is where a lender will pay you directly and take ownership of the invoices, they will collect the payment and settle any remaining amounts. With invoice factoring the lender will take a fee for providing the service or a percentage of the invoice amounts.

Invoice discounting is part of the invoice finance range of options and this is where the buyer pays promptly for a discount on goods or services.
Invoice financing can help a business maintain cash flow if payments are outstanding for a long time and money is required urgently. This option is ordinarily only available to businesses with a demonstrable annual turnover.

Development finance

Development finance loans are short to medium term loans designed for significant property refurbishments or developments,  and are based on the projected value of the completed works. This type of finance can be costly as it is often used for large and complex projects by property investors. 

The loan will be secured on the property and provided in stages as the work progresses. During construction the lender will have ‘step in’ rights to take over the project if the developer becomes insolvent to lessen the risk that the project won’t be completed.

When the work is finished the property can be refinanced with a longer term mortgage at a lower interest rate.

Approaching family for a loan

Borrowing from family can be a helpful alternative to taking out a bridging loan, and save you money on fees. It is important to be transparent about how long you will need the money for and how you intend to pay it back. 

If difficulties arise and you are unable to pay back the loan this may have significant repercussions in terms of your family relationships.

Private investors

When buying property as an investment, for example using the build, refurbish and rent model, you may look to borrow from a lender, or use the funds of a private investor.

How these two options compare depend on both the deal you’re offered by a bridging loan provider and the one offered by the investor.

Usually, a bridging loan lender will be more predictable in their approach than an investor and not become involved in the project details.

Individual investors don’t usually work to set criteria and may not be regulated, meaning you could be vulnerable to interference in the project, or unexpected changes to your arrangement. If you plan to work with individual investors then it is advisable to seek legal advice to provide clarity on the terms of the agreement.

Negotiating with an existing lender

If you’ve run into difficulties with your current mortgage provider and are in arrears, you may be asked to redeem your loan in full, or face the threat of repossession.

A bridging loan can be used to repay your mortgage, with the interest added to the loan, leaving you with no monthly repayments to make.

This is often a  temporary arrangement while you are waiting to sell the property or tidy up your finances before taking out a new mortgage.

The costs of bridging loans are higher than those associated with a mortgage. Even if you’re not paying any monthly payments, you will still be accumulating interest, which must be paid off.

Many lenders will be keen to avoid last-resort actions and have specialist teams to help those in debt, with a range of options.  If you are experiencing difficulties then contact your lender as soon as possible to outline your situation.

Fast house buying companies

Fast house buying companies can be used to release equity from a property quickly. The key difference is bridging finance allows you retain ownership of the property, whereas quick house sale companies are purchasing the asset from you.

It is important to note that fast purchases companies usually offer no more than 75% of your property value, meaning they make a considerable profit on the property.

If you need money urgently, and do not wish to retain a property to live in or develop then a fast-house sale could be an option albeit one that results in you retaining less of your property’s value.

What to look out for when searching for an alternative

When searching for alternatives to bridging loans there are a number of key factors to consider: they are:

Interest rate, fees and APR

The interest rate charged, any fees and the APR (a measure of the overall cost of borrowing) are primary considerations. While cost isn’t everything, where other factors in a comparison are similar, a saving on costs can be a simple way to differentiate products.

Additionally, if you are on a variable mortgage rate your interest payments can go up or down. Whilst lenders often change rates in line with the Bank of England base rates they ultimately set their own rates and do not necessarily have to immediately reflect any changes. If you require certainty about your payments you should make sure to let your lender know this and discuss fixed rate products.

Monthly costs

In addition to overall costs, it’s important to assess your monthly costs. Bridging loan charges can often be added to the loan and paid back when you sell a property. Other types of loan will require monthly payments, and in the case of a second-charge mortgage you will have to make two payments each month that can be a long term drain on resources.

Total repayment

When considering potential options, understanding the total repayment amount will help inform your decision. Whilst bridging loans are comparatively expensive in relation to mortgages they are designed for short term use and may be more cost effective for a short term project. 

Taking a longer term, lower rate, secured loan or mortgage and paying it back early is not always straightforward as many lenders charge significant early repayment fees. Additionally, having a number of early repayments on your credit file is actually less attractive to long term lenders as they look to make their money by providing funding over an extended period.

Flexibility

Consider flexibility, especially if you think that your plans may change within the loan term. The ability to repay your finance early where needed and the costs of doing so can be a key differentiator between financial products. A loan broker can work to find lenders who offer early repayment terms. 

Potential penalties and fees

As with all loans, it is important to keep up with repayments as late or missed payments can mean you incur fees and potentially damage your credit resting. In the worst-case scenario your property can be sold to pay off your debt if a loan, such as a bridging loan or mortgage, is secured against it.

How quickly can you get the funds?

Bridging loans can be arranged relatively quickly, ordinarily within 5-21 days. On rare occasions a loan can be approved in a few days although this is not typical. ABC Finance can give a funding decision 

If you are looking for a very speedy turnaround then it is advisable to compare lenders as there is a variance lender compliance requirements. It should be noted that if a lender is prepared to accept a lower standard of assurance on the property by undertaking fewer checks it is likely their risk is higher, and thus their rates will likely reflect this.

The lenders with the lowest rates often take longer as they have rigorous application processes.

You can read the ABC Finance guide to bridging loan timescales for further information on how long the application process takes.

Which bridging loan alternatives have the quickest completion time?

One of the main reasons people look for a bridging loan is the speed of completion, here we rank the alternative options:

Rank

Option

Completion time

Description

Comparison

Bridging loan

5 days to 3 weeks

A key factor with bridging loans is the speed of arrangement in comparison to other options. Whilst primary approval can take place in a matter of hours it can take from 5 days to three weeks to complete with a 14 day average.

1

Small business loans

24 – 48 hours

Small business loans can be approved within hours and funds transferred within 24 hours for business owners from the UK.

2

Merchant cash advances

24 – 48 hours

Merchant cash advances are a quick way to provide an upfront lump sum repaid through future sales. Approvals can take place within 24 hours and funds transferred in three days.

Loans range from £2,500 to £300,000

Repayment is made through sales on a daily basis at an agreed percentage.

3

Invoice factoring

24 hours

Invoice factoring allows you to release 80-90% of monies due. 

Repayment is made directly to the lender by the supplier who will pay any outstanding amount to you minus fees.

This can be a quick option to arrange.

Which bridging loan alternatives are the cheapest?

These loans rank highly in terms of low rates, and are useful for a side by side comparison.

Rank

Option

Completion time

Description

Comparison

Bridging loan

0.47% per month

Bridging loans can be offered up to 75% of the property value. These are regulated by the Financial Conduct Authority. Unregulated loans may extend to 80%.

Charge types: 1st, 2nd & 3rd considered

Term: 1-36 months (maximum 12 months for regulated bridging loans)

Interest type: Typically added to the loan

1

Mortgages (commercial)

From 2.5% over base rate.

Commercial mortgages are available at up to 80% Loan To Value.

Repayment terms are flexible with capital repayment, interest only or combination of both options.

Interest can be fixed or variable.

Repayment term: 5 – 30 years.

2

Small business loans

Rates from 2-13% per month.

Loans range from £5000 to £750,000 and can be secured, or unsecured.
There are many different types of business loans available, and they can be secured against assets or unsecured. Rates vary, however, an average example of secured bank loan is 3.5%.
Repayment terms are from 3-72 months.

3

Invoice factoring

0.5% – 3% Factoring fee

Invoice factoring fees are charged by the lender on the final invoice and are variable.

Choosing the right solution for your needs

Finding the solution that is right for you can take time, a good first step is to outline your absolute priorities – do you want to focus on speed, low cost finance or flexibility? 

When looking for financial advice check if your broker or lender is regulated by the Financial Conduct Authority. Some specialist providers are members of UK Finance, a trade association, promoting high standards within the financial services industry.

Still considering a bridging loan?

Undertaking the research required to find the perfect bridging loan can take time. Using a specialist loans broker, such as ABC Finance, means that they can negotiate with lenders to find you the best possible deal without you having to apply repeatedly and individually to lenders.

ABC Finance business has been supporting businesses since 2000 and is regulated by the Financial Conduct Authority. Our experts work with a wide panel of lenders and take time to understand your business needs to get you the best deal; our aim is to save you money.

We’ve helped over 30,000 businesses find a loan – our Trustpilot scores and reviews demonstrate how happy our customers are with our service.

Getting a quote is easy, our advisors will call you back for a confidential, friendly no-obligation discussion.

Bridging Loans by ABC Finance

FIBA Member
ABC Finance Reviews


Learn more about bridging loans

What Are Bridging Loans and How Do They Work?

Bridging loans are short-term loans that  are secured against property. They are not mortgages although work in a similar way albeit for a much shorter … Read more

Do I Need a Solicitor for a Bridging Loan?

Bridging loans,also known as commercial bridging loans, are available to businesses of all sizes requiring speedy access to funds. They are secured against existing property … Read more

Want help finding your perfect solution?

Request a callback from our team of experts at a time convenient for you.