Buy To Let Mortgages Vs Bridging Loans: Which Should You Choose?

Choosing the right type of property finance is key to making money as a property investor.

If you don’t pick the correct option, you’ll end up wasting time and money, and could even have your application declined.

If you’re looking to purchase a property quickly, or plan to refurbish it after purchase, a bridging loan may be a better fit for you than a buy to let mortgage.

In this guide, we break down what each product is, how they work, the key differences between each, covering common scenarios and which could be a better fit.

What is a buy to let mortgage?

A buy to let mortgage is a type of long-term mortgage that is used to purchase or refinance a property that is to be let through an assured shorthold tenancy.

BTL mortgages are usually arranged on an interest only basis and are designed to be used as a form of long-term finance that allows property investors to profit from rental income and the increase in property value.

Buy to let mortgages can be fixed rate or variable.

What is a bridging loan?

A bridging loan is a type of short-term property finance that is used to purchase or refinance a property or land.

Bridging loans are a fast and simple way to borrow money, with interest often being ‘rolled up’ into the loan, leaving you with no monthly payments to make.

As a type of short-term finance, bridging loan rates are higher than those offered on buy to let mortgages, meaning they’re best used for short periods of no more than 12-18 months.

While the rates charged are slightly higher, there are significant benefits to bridging, including the fact that where refurbishment is being undertaken, it is possible to borrow the full refurb costs.

Read more – Bridging loan for an HMO or MUFB bridging loans.

What are the key differences between buy to let mortgages and bridging loans?

They key differences are:

• Loan term – BTL mortgages are long term – usually for 25 years or more, while bridging loan terms are usually 12-18 months.
• Completion timescales – Bridging loans can be completed in anything from 3 days-3 weeks while buy to let mortgages generally take 6-8 weeks.
• Monthly payments – Bridging loans generally have no monthly payments, while buy to let mortgages usually have monthly interest only payments.
• Refurb or extension – BTL lenders are generally uncomfortable with heavy refurbishment works and may not allow this. Bridging lenders fund specific products for extending properties.

When should I choose each product?

Understanding when each product is a better fit can save you a lot of time and money. Here are some common scenarios.

Buying a property at auction

When buying a property at auction, completion must take place within 28 days of your successful bid, or you risk losing the right to purchase and the 10% deposit that must be paid on the day of auction.

For this reason, a buy to let mortgage is unsuitable for an auction purchase as they take 6-8 weeks to complete. It’s not possible to apply before the auction as you can’t be sure what the purchase price is until after the auction.

For this reason, you should consider auction finance or a bridging loan for an auction property.

Buying a property before selling a current one

When looking to purchase before selling your existing property, you may not qualify for both mortgages at the same time. Even if you do, it may not be a good idea financially, depending on your early repayment charges.

For this reason, most people use a bridging loan to buy a new property before selling an existing one.

Buying a property for refurbishment or conversion

Most BTL lenders won’t allow works beyond a light redecoration during the term of their mortgage.

If you’re planning anything heavier, consider a couple of types of bridging loan – property refurbishment finance or property conversion finance.

Buying a property to hold and let out

When buying a property to let and hold, without a strict time pressure to complete quickly, a buy to let mortgage is the best option.

For holiday rental properties, consider a holiday let mortgage, which works in a similar way to BTL mortgages.

Read more Bridging loans for farmers or Bridging loans for a hotel.

Releasing equity from an existing buy to let property

When releasing equity from an existing portfolio, without significant time pressure, a buy to let mortgage will be the most cost effective option.

If your current mortgage has early repayment charges, consider a buy to let secured loan.

Flexibly borrowing against a buy to let portfolio

When looking to borrow against a portfolio flexibly – meaning you can borrow and repay funds as needed, consider a property investor hunting licence.

These products allow you to use the equity in your portfolio as a form of revolving credit to allow you to profit from property transactions.