What is the difference between a bridging loan and a mortgage?

What is the difference between a bridging loan and a mortgage?

Bridging loans differ from mortgages significantly and have unique purposes and structures.

Bridging loans and mortgages both help people purchase property. They serve distinct purposes and financial needs.

What is a Bridging Loan?

The key difference between a bridging loan and a mortgage is generally dictated by your circumstances and needs.
A bridging loan is short-term finance, typically lasting a few weeks to 24 months for residential or business purposes.
It helps fill funding gaps, like buying a property before selling another. These loans are fast and property-secured.
Unlike mortgages, borrowers repay bridging loans quickly, often after selling a property or refinancing with a long-term solution.

Key Features of Bridging Loans

• Short-Term Solution: Designed for up to 12 months, but longer terms depend on security and loan purpose.
• Fast Approval: Applications are quicker than mortgages and are ideal for urgent property purchases or financial transactions.
• Relaxed Criteria: Lenders overlook missed payments if they don’t impact the planned loan repayment strategy.
• No Monthly Repayments: The loan accrues interest, which is repaid in full at settlement, supporting short-term cash flow.
• Higher Interest Rates: These loans have higher rates due to their short-term, flexible nature.
• Flexible Use: Funds are used for property purchases, renovations, or managing cash flow during transactions.

Mortgages: Overview

What is a Mortgage?

A mortgage is a long-term loan, lasting 10 to 40 years, for purchasing residential or commercial property.
Borrowers make monthly payments covering principal, interest or both. Mortgages require affordability checks to ensure repayment capacity.

Key Features of Mortgages

• Long-Term Finance: Mortgages are repaid over extended periods, making them ideal for property ownership.
• Lower Interest Rates: These loans have lower rates than bridging loans due to lower lender risk and longer terms.
• Strict Qualification Criteria: Creditworthiness and affordability checks are required to approve the loan.
• Regulated by FCA: Residential homeowner mortgages are highly regulated, offering borrowers protection and transparency.

Key Differences Between Bridging Loans and Mortgages

Loan Purpose

• Bridging Loans: Used to bridge short-term gaps. Buying a property before selling another or financing renovations, for example.
• Mortgages: Designed for long-term property purchases, repaid over years.

Loan Duration

• Bridging Loans: Short-term, lasting months to one year, sometimes extending to 24 months for specific purposes.
• Mortgages: Long-term, with repayment terms ranging from 15 to 40 years.

Interest Rates and Fees

• Bridging Loans: Interest rates range from 0.5% to 1.5% per month. Fees are typically higher than mortgage fees.
• Mortgages: Interest rates are annual, with fixed or variable options based on borrower creditworthiness.

Loan-to-Value (LTV) Ratios

• Bridging Loans: LTV typically reaches 75%, considering fees and interest deducted from the loan.
• Mortgages: LTV can reach 95%, especially for first-time buyers or special schemes.

Regulation

• Bridging Loans: Not all loans are FCA-regulated, especially for business purposes. Residential loans under FCA rules are stricter.
• Mortgages – All residential mortgages are regulated by the FCA, ensuring fair treatment and protection for borrowers.

Pros and Cons of Bridging Loans vs. Mortgages

Bridging Loans

Pros:

• Quick access to funds
• Flexible usage for property and financial transactions
• Secured on multiple properties

Cons:

• High interest rates and fees
• Short-term duration requiring a clear exit strategy
• Limited regulation depending on loan purpose

Mortgages

Pros:

• Lower interest rates
• FCA regulation ensures borrower protection
• Ideal for long-term property ownership

Cons:

• Slower approval process
• Strict qualification criteria
• Less flexible than bridging loans

Conclusion

Bridging loans and mortgages serve different purposes. Choose a bridging loan for short-term needs, like bridging a property purchase and where a mortgage cannot be obtained in time
Opt for a mortgage for long-term property ownership, with lower rates and regulated protections. Assess your financial goals before making a decision.

Always talk to a specialist broker / adviser who can compare both options from the entire market.

People Also Asked

How do bridging loans work?

Are there different types of bridging loans?

What are the risks associated with bridging loans?

Can I use a bridging loan for business purposes?