Purchasing our dream home is something we’d all like to do, but it’s much easier said than done. Finding a dream home is hard enough, but obtaining a source of finance capable of raising the money you need when you need it is often even tougher. What’s more, dream homes don’t tend to stick around on the market for long, making the need for finance a pressing one indeed.

There is a wide variety of loan types available to a potential home buyer. These range from the traditional mortgage to more niche and novel loans, such as bridging loans and home equity loans. In this article, we will focus on the latter two loan types, discuss the differences between them, and show which would be best for your situation. Let’s get started.

What is a bridging loan?

Bridging loans are a form of short-term finance that aims to “bridge” the gap between a purchase and a long-term solution. As a short-term solution, bridging loan terms don’t usually exceed 12 months, with most lasting mere months. This is quite a distinctive feature, as many borrowers are used to loans that last years, rather than months.

Bridging loans are a form of secured finance, meaning they require the borrower to put forward physical assets for use as collateral. Lenders will place a lien on collateral assets, allowing them to be seized in lieu of repayment should borrowers ever default. This means borrowers will shoulder additional risk compared to unsecured loans, but will enjoy certain benefits as a result. Bridging loans are able to be quick and flexible due to the requirement of collateral, as the application process can be greatly expedited. Bridging loan lenders are mostly concerned with the value of collateral assets, rather than income or credit rating. This means that not only will your bridging loan be incredibly responsive, but it will also be as flexible as your assets are valuable.

Related: Can You Get 100% Bridging Finance?

What is a home equity loan?

Home equity loans are another form of secured loan, though the collateral is quite specific. As the name suggests, home equity loans will use the equity you have in your home as collateral, and this must be done before your home is placed on the market. This tends to mean home equity loans require a more extensive amount of planning beforehand, to make sure you aren’t left with a difficult debt to pay and a home that’s slow to sell.

While careful planning may be a constraint, home equity loans have advantages in other areas. For one, they are a long-term loan, capable of lasting up to 20 years if needed. This allows borrowers a good degree of flexibility in certain situations. Due to the long duration of home equity loans, borrowers can be more reactive in how they use their loans. For example, borrowers could choose to use a home equity loan to cover moving costs, refurbishment project expenses, and unexpected costs that often crop up when it comes to moving house, all without having to cram it into a short timeframe. However, if a borrower struggles to sell their old home, it can get expensive fast.

What is the difference between a bridging loan versus home equity?

While sharing the same category and a few similarities, bridging loans and home equity loans are very different financial solutions. Where bridging loans are a short-term solution, home equity loans are long-term. Bridging loans are often expensive, sporting comparatively high interest rates and fees, home equity loans are the opposite. Where home equity loans require a more deliberate approach to planning, bridging loans need only a solid repayment plan, and can be used more freely. These differences and more make both loan types valuable options in some instances, and lacking in others. The needs of your specific situation will determine which loan will be of use to you.

When are bridging loans useful?

Bridging loans are exceptionally useful for raising a large sum of money at short notice. The application process is quick, especially so if the borrower is prepared in advance. This allows the process to be completed and funds released in short order, sometimes even in as little as 48 hours. This swiftness, coupled with a high degree of flexibility, makes bridging loans ideal for seizing opportunities that might be short-lived. Dream homes, auction properties, and lucrative development opportunities can all be snapped up easily with the backing of a bridging loan.

However, bridging loans aren’t always the right option. While flexible in terms of raising money, bridging loans aren’t great at responding to shifting expenses or unexpected costs. For instance, if you use your bridging loan to purchase a development opportunity that goes over budget, you’ll either need a second bridging loan, or another method of covering the shortfall. Bridging loans are also quite expensive, with interest rates sometimes going into double digits. This, combined with their short-term nature and risk of asset seizure, can make bridging loans a poor option for borrowers facing financial difficulty.

When are home equity loans useful?

Home equity loans are useful in much the same circumstances as bridging loans, but have the additional benefit of a much longer loan term. When the brevity of bridging loans is a deal breaker, home equity loans could be the right choice for you. Moreover, home equity loans tend to be cheaper than bridging loans, with interest rates around the 5% mark. This can make home equity loans a more appealing choice if your finances can’t support a bridging loan.

The main drawback to home equity loans is that they must be taken out before your home goes on the market. This isn’t a problem if your home sells when you expect, but a quick sale can never be guaranteed. If the sale of your previous home is delayed, you may need to pay for the home equity loan, your previous home’s mortgage, and potentially other costs all at once. This can completely negate the benefit of home equity loans being cheaper, and put serious strain on your personal finances.

Which should you use?

Ultimately, which loan you should choose completely depends on your situation. Both loans have their pros and cons, best use cases, and associated risks. That said, the requirement of home equity loans to be taken out before your home goes up for sale is significant, to say the least. It can make an otherwise good loan bad, if your previous home were to struggle to find a buyer. Bridging loans don’t have this drawback, and can be relatively safely obtained as you close on a deal to sell your previous home. This can make bridging loans seem the more appealing option of the two, though it is vital that you obtain professional advice before you take action.