What Is The Difference Between A Standard Mortgage And A Bridging Loan?
Mortgages are essentially loans secured against property and is designed to be a longer-term loan. They are generally arranged for a term of 5-35 years.
Although bridging loans are also loans secured against property, the term is much shorter. Usually between 1-18 months.
As the loan term is so long, with between 60-420 monthly repayments required to meet the loan terms in full, detailed underwriting is required to ensure that defaults are kept to a minimum. This is a time-consuming process, meaning it often takes 6 weeks to complete.
The underwriting of a mortgage is focussed on the ability to maintain the monthly payments over the long-term.
This differs greatly from the underwriting of a bridging loan. The monthly interest rates on bridging loans are usually rolled into or deducted from the loan. As there are often no monthly payments to make, the underwriting process is much simpler, focussing only on how the loan will be repaid.
If the property is to be sold, and the interest rolled up, then the underwriting can be very light touch and based on the property sale.
Where the loan is to be exited through a refinance, the lender will be satisfied if it can be proven beyond a reasonable doubt that a refinance is available.
Breaking Down The Reasons For Taking Out A Bridging Loan
In this section, we break down the main reasons that taking out bridging finance could be the right way to go if you’re in the market for a short-term lending solution.
Buying a Property at Auction
When buying a property at auction, short-term bridging finance, also known as auction finance, is a natural choice. This is due to the time-sensitive nature of auction purchases. Once a property is won at auction, the transaction must usually be completed in 28 days.
As bridging loans can be completed quickly, they are generally more suitable for auction purchases than mortgages.
Completing A Property Purchase Before Your Current Property Has Sold
Maintaining a place in a chain is a popular reason for taking out a bridging loan. When your current property is yet to sell and your purchase must be completed, this can cause problems.
A bridging loan can be used to bridge the gap between the purchase and sale. Once your current property is sold, the bridging loan can be repaid.
To Prevent Repossession
When repossession is imminent, a bridging loan can be used to repay arrears and allow you to take back control of the property. Where interest is rolled up, the pressure of monthly payments on a mortgage can be taken off you. Usually, the property will then be sold at full value, or even refinanced to a new lender to repay the loan.
To Raise Funds Needed to Complete a Major Refurbishment or Extension to a Property
Mortgages are designed as loans to enable you to purchase and live in or let a property. Where heavy refurbishment or building works are to be undertaken, you may be breaking your mortgage conditions. This is where bridging loans can be used, and the lender may even be happy to lend you the funds needed to carry out your refurbishment.
To Complete A Below Market Value Purchase
When purchasing a property below market value, some bridging loan lenders are happy to lend up to 100% of the purchase price of the property. This enables investors to purchase a property without putting down a deposit.
This would not be possible using a mortgage, as the maximum loan to value is usually based on the lower of the purchase price, or open market value.
To Raise Capital Quickly
When looking to raise capital quickly, a bridging loan is often the best option. As they are secured against property, you are often more likely to be approved than you would be for a personal loan. Also, it is far quicker to arrange a bridging loan than other longer-term lending alternatives. This makes bridging finance the ideal choice for those looking to raise capital quickly.
How Do I Know If I Qualify For A Bridging Loan?
Most people are eligible for bridging finance, as lenders tend to be very flexible. The application is largely based around your intended exit route and the equity available in your property. The whole process can be made simple with the help of a specialist broker.
By talking to one of our bridging loan advisors, we will be able to give you an idea of your eligibility over the phone, and a written agreement in principle within 2 hours.
Are There Other Options Available If A Bridging Loan Isn’t The Right Choice?
Yes, there are a few different lending products available. Where a bridging loan isn’t the right choice, but a loan secured against property is required, you should consider both secured loans and mortgages.