Both bridging loans and mortgages are primarily used to finance the purchase of property. Each form of finance is capable of raising large amounts of finance, and they share some similarities in how they work. For example, both are secured loans, meaning they will require the borrower to use assets as collateral as part of the loan agreement. But what are the differences between the two loans? Better yet, should you use a bridging loan or mortgage when looking to finance the purchase of your new home?

In this article, we will answer these two questions, and pit bridging loans and mortgages together to see which is best for purchasing a property. Let’s get started.

Bridging loans and mortgages – is there a difference?

Bridging loans and mortgages fall under the same category of secured finance. As such, they do share some similarities common to loans under this category. Both require the borrower to use collateral assets, both can raise large amounts of capital, and both are commonly used to fund the purchase of property. However, that’s about where the similarities end.

Bridging loans and mortgages, while used for similar purposes, are very different forms of finance. They take very different approaches to providing finance; where mortgages are long-term, regularly lasting 20-30 years, bridging loans seldom span a full year. Bridging loans aim to be a more short-term solution, acting to “bridge” the gap between a purchase and something more long-term. This difference means that the practical applications of bridging loans and mortgages vary considerably.

Why use a bridging loan?

Bridging loans and mortgages are quite different in practice, with the difference in loan terms being very impactful. Given the differences, bridging loans and mortgages have their best use cases and areas where borrowers might find them lacking. With this being the case, why use a bridging loan over a mortgage?

Bridging loans tend to beat mortgages where the need for speed and flexibility outweighs the short-term nature of the loan. Bridging loans can meet these two needs, while still being capable of raising large volumes of capital. This makes bridging loans excellent for the commercial purchase of property, such as purchasing a development project from auction, or for purchasing a property at short notice. Mortgages typically cannot do the same; either they are simply not applicable, as is often the case when purchasing a development project, or they cannot move fast enough, and the window of opportunity closes before a purchase can be made. Whether you intend to purchase a property from auction, or simply want to purchase your dream home without delay, a bridging loan can be a great solution.

Also Read: Are Bridging Loans Regulated by the FCA?

Fast application process

In either of these cases, bridging loans can succeed where mortgages might fail. Lenders aren’t as concerned with the traditional loan application criteria, instead being focused on the value of collateral assets. In this case, your existing home is likely to be a good candidate for collateral. This makes for a much faster application process, leading to the rapid release of funds. As such, you will be able to make a cash offer, one that will be appealing to any seller.

Once you have purchased your new property, repaying your bridging loan will be quite simple. You will have two main options – the sale of your existing home, or the refinancing of your bridging loan. Which is appropriate for you will depend on your situation and future plans. If you purchased a property in need of development, you will likely have to sell a previously owned asset to raise the funds, or sufficiently refurbish the property such that a mortgage lender would be willing to approve a refinancing application. If you purchased a new home, you could sell off your existing home, refinance the bridging loan, or make use of any existing equity and blend the two together. In either case, you will have no trouble repaying your bridging loan, mitigating its main downside of being short-lived.

Also Read: Are Bridging Loans Dangerous?

Why use a mortgage?

When in their field of expertise, bridging loans tend to do an outstanding job. Their near-unrivalled level of speed and flexibility, combined with the ability to raise vast sums of money, make them a truly effective option indeed. However, bridging loans can cause problems when not played to their strengths.

For example, using bridging loans where a long-term form of finance is needed is a good way to rack up additional expenses without getting much in return. Bridging loans are notoriously expensive, sporting comparatively high interest rates and varying additional costs. Coupled with the pressure of a short-term loan agreement, borrowers can pay a great deal if they can’t repay their bridging loan quickly. This can make for a huge short-term financial pressure, one that simply can’t be sustained by every borrower in every scenario.

On the other hand, mortgages can be a cheaper alternative in the short term. Although borrowers will make repayments over a much longer period of time, which could mean they end up paying more, the immediate pressure on personal finances is much lighter. This can mean repayments are easier to make, which reduces the overall risk a borrower is exposed to. This makes mortgages the better option in two scenarios; when borrowers cannot comfortably keep up with bridging loan payments, and when a long-term solution is needed immediately.

Bridging loan or mortgage – which should I choose?

The answer to this question depends on your situation. If you are looking for a fast, flexible form of finance in order to make an almost immediate purchase, look no further than bridging loans. Bridging loans excel at these kinds of situations, providing large amounts of capital and allowing borrowers to swiftly act to seize opportunities as they appear. However, bridging loans are usually more expensive than their counterparts, with their short-term nature meaning a higher cost and level of risk for borrowers. If neither the cost nor risk can be sustained, or the need for a short-term solution simply isn’t there, then a mortgage could be the better option. As always, it is important to consult a professional for financial advice before you act to ensure you make the best choice for your situation.