There are several key distinctions between the two products, despite the fact that both are forms of loans secured against real estate or land.
To help you understand precisely how each product should be used to achieve the best results for borrowers, we break down those key differences in this article.
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What Are The Main Uses Of Each Product?
Bridging finance is a short-term loan that can last anywhere between three and twenty-four months.
These loans are intended to fill the gap between occurrences, such as purchasing a property before selling it or renovating one to temporarily render it unmortgageable.
A bridging loan is considered a more complimentary product for circumstances where obtaining a long-term mortgage would be unsuitable or unachievable.
Mortgages, which are long-term loans secured against property and enable you to buy or raise money against the property against which they are secured, are typically very well understood.
Many lenders offer terms of up to forty years, but mortgages nowadays are typically taken out between twenty-five and thirty periods. The minimum loan term generally is five years.
How Are They Repaid?
Bridging finance is an interest-only finance product, so rather than through regular repayments, the loan is repaid in full at the end of the term or sooner. Generally, the lenders in the market now have no early repayment costs (ERCs) so you are able to exit without incurring exit fees.
Your exit strategy, which frequently entails the sale of the security property or refinances on a mortgage( often referred to as "term loan" among bridging loan professionals), is how you intend to accomplish this.
Bridging loan interest is sometimes paid on a monthly basis if it is a serviced loan, but it is frequently increased or subtracted from the initial loan amount. There are no more monthly payments to make once this is finished. To understand more about this you can access our bridging loan calculator or give us a call at 0208 952 5280.
Mortgages can be financed with capital repayment or interest only, in contrast to bridging loans. For buy-to-let investment mortgages, interest-only loans are more common.
In either case, regular payments are made to cover the interest each month. For mortgages with capital repayments, the monthly payment is set at a level that will fully recoup the capital owed over the course of the loan.
What Are The Differences In The Application Process Between Bridging Loans and Mortgages?
Bridging loans can be arranged quickly, typically taking between 5 and 14 days to complete.
The exit plan and asset is typically the main factor that bridging loan lenders focus on. Other issues will typically be largely ignored by many lenders if your exit plan and security are sound and dependable.
Due to this, the bridging loan process is very simple and hassle-free.
Unless it is necessary to demonstrate that your exit plan is feasible, the majority of lenders won't demand proof of income. Have a look at our case studies where we have completed loans within 10 working days.
Your ability to make your payments on time is taken into account by mortgage lenders. They start concentrating on your income and credit history as a result.
As a result, issues will arise if either area is perceived to be weak.
Underwriting is very thorough, and the lender will need a lot of information because of the extended commitment for both of you.
As a result, the process is ultimately slowed down, so you can anticipate that your mortgage will be finished in anywhere between 6 and 8 weeks.
What Are The Differences In Cost Between Bridging Loans and Mortgages?
Mortgage interest rates are almost always lower than those for bridging loans. However, this does not always imply that bridging loan costs are higher than mortgage costs.
Mortgages will be more affordable over the long term, but a bridging loan might actually be less expensive in the short term.
This is because mortgage lenders typically charge early repayment fees, whereas bridging loan lenders don't.
How Flexible Is Each Product?
One of the main benefits of bridging finance is flexibility. These types of loans can be used by borrowers with virtually any credit profile, against almost any security, and for any legal purpose.
Each application is evaluated by lenders based on its merits, so regardless of your background if it makes sense, it has a good chance of being accepted.
Mortgages usually have certain restrictions on the condition of the building. Bridging loans are more flexible with fewer criteria to qualify, for example, they can be used to help fund development or refurbishment.
Mortgage lenders' flexibility isn't their greatest asset. They frequently underwrite using very strict standards and never stray from them.
Because of this, there isn't much room for common sense when it comes to lending, but as the application must follow strict criteria and frequently it's a tick box exercise.
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Accelerated Finance Limited only considers applications for commercial or investment properties.
Accelerated Finance Limited is not regulated by the financial conduct authority and only provides unregulated loans via our network of lenders. Your property is at risk if you fail to make payments on a Mortgage Contract. Please note that Accelerated Finance Limited and its employees do not give financial advice or recommendations on any product.