When it comes to financing the purchase of a new property there are typically two main options open to you irrespective of whether you are an individual, property developer or a landlord looking to add to your portfolio. But which is the best option? That is totally dependent on your specific needs and circumstances.
A bridging loan serves as a short-term solution, bridging the financial gap between the purchase of a new property and the completion of the sale of an existing one. On the other hand, a mortgage is a long-term financial arrangement designed to cover the cost of property purchase. Both types of loans are secured, necessitating the use of assets as collateral.
A traditional mortgage is something that most people understand as they tend to be more straightforward than a bridging loan. However, there may be a number of reasons why it is not possible to initially get a mortgage when buying a new property. In these cases, bridging finance offers you an opportunity to get the funding you need to complete the purchase.
So, in this blog post we will look at some of the differences between bridging loans and mortgages which may help you make an informed decision on which is best suited to your needs.
Some Important Things You Should Know about Bridging Loans and Mortgages
The Loan Acceptance Period:
If you need access to funds quickly then a bridging loan is a good option. There is much less paperwork involved and you could get your loan within a couple of weeks. In the case of traditional mortgages, the application process is much longer and more involved taking anything from 6 weeks to 3 months.
The Period of the Loan:
Bridging loans are short term finance, and the terms of the loan are typically between 6 and 12 months. Mortgages are longer term financial solutions and as such are usually taken out for periods of between 15-30 years.
Interest rates:
Bridging loan interest rates are generally much higher when compared to mortgage rates, usually hovering at approximately 1% per month. This heightened rate reflects the perceived higher risk associated with the short-term nature of bridging loans. Interest is accrued on a monthly basis but can also be deferred and settled at the end of the loan term.
Unlike mortgages, bridging loans do not impose early repayment penalties, offering flexibility in this regard.
Mortgages and Bridging Finance are Both Secured Loans:
Both mortgages and bridging finance options are categorised as secured loans, necessitating the provision of assets as collateral, typically property. The lender establishes a “charge” on the designated security property, which will be released upon the full repayment of the debt.
When the same asset is used as collateral to secure an additional loan from a different lender, this is referred to as a “second charge” loan. This arrangement entails a legal agreement that specifies the order in which lenders receive their repayment. In the event of a property repossession, the initial charge lender will receive full payment first, with any remaining funds allocated to the second charge lender.
As is the case with all secured loans, it is imperative to ensure that you can meet the monthly repayment obligations to safeguard your property from the risk of repossession.
The Repayment Options on Bridging Loans are more Flexible:
You have the option to select either an open or closed bridging loan. Closed bridging loans come with a predetermined repayment date, whereas open bridging loans offer flexibility, making them particularly useful when you haven’t yet secured a buyer for your current property.
In contrast, mortgages are typically closed loans with stringent terms and substantial penalties for any failure to meet repayment obligations. However, bridging loans provide greater flexibility, offering various repayment choices, including interest-only payment plans or deferred payments.
Bridging Loans often work well for renovation projects:
If you are a property developer or someone buying a house that requires significant refurbishment work, it may not qualify for a traditional mortgage. By taking out a residential bridging loan or commercial bridging loan you can access the funds needed to finish the work until the property is sold or can be mortgaged in the traditional way.
Other types of bridging loan included buy to let bridging loans, land bridging loans, and farm bridging loans.
Bridging Finance is Often Used for Auction Purchases:
When buying at auction the sale must be completed within 28 days. If you see a property at auction, you are keen to buy but have not yet sold your own property, an auction bridging loan can provide you with the cash needed to complete your purchase then repaid when your home sells.
When you take out a bridging loan you must have a clear exit strategy:
Where bridging loans are concerned lenders will typically request proof of a well-defined exit plan, specifying the method and timeline for repaying the loan. Homeowners typically settle their loans upon the sale of their property or upon securing a mortgage. In the case of property developers, a viable exit strategy may revolve around proceeds from the sale of additional properties or investments or refinance onto a buy to let mortgage.
Loan criteria:
Mortgage lenders carefully review your credit history, and any previous instances of poor credit could have a negative impact on your application. Additionally, they will demand evidence of your income.
In contrast, with bridge loans, your credit score and income are of less concern to most lenders. Instead, they place greater emphasis on factors such as your financial stability, the value of the property in question, and your proposed method for repaying the loan, commonly referred to as your “exit strategy.”
To find out if you qualify, contact Pyxis Capital today. Alternatively, see exactly how a Bridging Loan would look for you by using our quick and easy Bridging Loan Calculator
Conclusion
In summary, bridging loans provide speed and flexibility for temporary financing needs, while mortgages offer stability and long-term commitments for property acquisitions. The choice between them depends on individual circumstances and the specific requirements of the property transaction.
No matter whether you choose to go for a mortgage or a bridging loan it is imperative that you do your research. Make sure you make a comparison between different lenders and the terms they are offering. Before proceeding with a secured loan, it’s essential to confirm that you can easily manage the repayments. Failing to do so may put your collateral, possibly your home, at risk of being lost.
Hopefully the information provided in this blog will give you more insight into the differences between a mortgage and a bridging loan and has left you better informed on which one is best suited to your specific requirements. If you want to know more about the process, or wish to begin your application, contact Pyxis Capital today.