While both products are a type of loan which is secured against property or land, there are a number of distinct differences between the two.
In this article we break down those key differences to help you to understand exactly how each product should be used to produce the best outcome for borrowers.
What are the main uses of each product?
Bridging finance is a short-term product, usually taken for anything from 1 to 18 months.
These loans are designed to bridge a gap between two events happening, for example, buying a property before selling your existing one, or while you undertake refurbishment on a property, making it temporarily unmortgageable.
A bridging loan isn’t designed to be a viable long-term alternative to a mortgage, it is more of a complimentary product for situations where a mortgage would be unsuitable or unachievable.
Mortgages are generally very well understood, and are long-term loans which are secured against property and allow you to purchase or raise funds against the property that they are secured against.
Mortgages are usually taken out over periods of up to 30 years, with some lenders offering terms up to 35 years. Most lenders have a minimum term of 5 years.
How are they repaid?
Bridging finance is an interest only finance product, meaning the loan is repaid in full at the end of the term, or sooner, rather than through regular repayments.
How you plan to do this is known as your exit strategy, and often involve the sale of the security property or refinance onto a mortgage (often referred to as a term loan among bridging loan professionals).
The interest on bridging loans is sometimes paid monthly, but is often added to, or deducted from the amount borrowed when the loan is taken. When this is done, there are no monthly payments to make.
Unlike bridging loans, mortgages can be taken out on a capital repayment or interest only basis. Interest only mortgages are more common for buy to let mortgages, with residential mortgages usually being capital repayment.
Either way, the interest is paid each month through regular payments. For capital repayment mortgages, the monthly repayment is set at a level that will also fully repay the capital owed at the end of the term.
How do the application processes differ?
Bridging loans can be arranged quickly, usually completing in anything from 5-14 days.
Bridging loan lenders tend to focus on your exit strategy, as this is how they will be repaid. If your exit strategy is solid and reliable, then other issues will usually be largely ignored by many lenders.
This makes the bridging loan process very straightforward and free from red tape.
Most lenders won’t require proof of income, unless it is needed to verify that your exit strategy is realistic.
Mortgage lenders underwrite based on your ability to make your repayments without issue. This leads them to focus on your credit history and income.
As such, any perceived weakness in either area will lead to problems.
As they are such a long-term commitment for both you and the lender, underwriting is very detailed and the lender will require a lot of information.
This ultimately slows down the process, meaning you can expect a mortgage to complete in anything from 6-8 weeks on average.
What are the differences in cost?
The interest rates charged on mortgages are almost always lower than those charged on bridging loans. That said, that doesn’t always mean that bridging loan costs are higher than those of a mortgage.
Over a longer term, mortgages will be the cheaper product, but for short-term situations, a bridging loan may actually work out cheaper.
That’s due to the fact that bridging loan lenders don’t usually charge early repayment charges, whereas mortgage lenders do.
How flexible is each product?
Flexibility is one of the main advantages of bridging finance. They can be taken against almost any security, for any legal purpose and by borrower’s with almost any credit profile.
Lenders underwrite each application on its merits, so if it makes sense, then it has a great chance of success – regardless of your history.
Lenders can lend on second charge and even third charges, whereas mortgages can only be arranged on a first charge basis. Where additional security is offered, lenders will even lend up to 100% of the purchase price of a property.
Flexibility isn’t the main strength of mortgage lenders. They tend to underwrite based on very strict criteria and don’t deviate from it.
- This means there is little flexibility to take a common-sense approach to lending where something doesn’t quite tick the lenders boxes, but the application ultimately makes sense.