When looking at property finance you may wonder about the costs of the different loan types.
Bridging loans and mortgages are the most common but the costs can be very different. Before you decide you need to know the real cost of each option.
We’ll break down the costs of bridging loans and mortgages so you can make an informed decision that suits your financial goals. We’ll be looking at UK specific info and practical tips to help you through the process.
Is A Bridging Loan More Expensive Than A Mortgage?
Let’s Start With The Basics
Bridging loans and mortgages are used for different purposes in property finance.
A bridge loan is a short term funding solution, lasting no more than 12/24 months, with higher interest rates than traditional mortgages because of the risk involved.
Mortgages are long term loans to buy or refinance property, usually with repayment terms of 25 to 35 years. They’re the standard choice for homebuyers and buy-to-let investors looking for stable long term finance.
The UK lending market has established options for both bridging loans and mortgages.
High street banks, specialist lenders and private banks all operate in this space.
For example if you’re buying a new property before selling your current one a bridging loan could provide the funds to secure your new property while you wait for your existing property to sell.
When comparing bridging loan vs mortgage, remember bridging loans are more expensive due to higher interest rates and fees but can be more useful for short term financing during property transactions.
What is A Bridging Loan?
A bridging loan is a short term financing solution to cover the temporary gap between buying a new property and selling an existing one.
It provides immediate funding for a short period, usually a few weeks to 12/24 months.
Bridging loans are used by individuals, businesses and property developers to get funds quickly so they can take advantage of opportunities or address urgent needs.
For example if you find a property at a great price but haven’t sold your current home yet a bridging loan can provide the funds to secure the new property.
This type of loan is also popular in property auctions where buyers need to complete the purchase within a tight timeframe. Bridging loans offer flexibility and speed making them a useful tool in many situations.
What is A Mortgage?
A mortgage is a long term loan to buy or refinance a property.
It’s a secured loan where the property in question is the collateral. Mortgages are offered by banks and other financial institutions with repayment terms of 15 to 30 years. They’re used by individuals and families to buy residential property and businesses to buy commercial property.
The long term nature of mortgages makes them suitable for those looking for stable & predictable long-term finance. When applying, you are required to provide proof of your income and to pass affordability checks.
Monthly repayments usually consist of interest and capital, which reduces the loan balance over time. Mortgages are the backbone of property ownership, providing a structured and manageable way to finance big property investments.
Bridging Loan vs Mortgage
Bridging loans and mortgages are two different types of finance solutions for different needs and situations.
Here are the differences:
Purpose
Bridging loans are for short term funding for immediate needs, such as buying a new property before selling an existing one. Mortgages are for long term finance of property purchases, offering stability over many years.
Duration
Bridging loans are short, usually from a few weeks to 24 months. Mortgages can be 15 to 30 years, more suitable for long term property ownership.
Interest Rates
Bridging loans have higher interest rates than mortgages. This is because of the short term nature and the increased risk to the lender.
Repayment Terms
Bridging loans are interest only, the principal is repaid in full at the end of the term along with the accrued interest. Mortgages are monthly repayments of interest and capital, spreading the cost over a longer period.
Now that you know the differences, you can choose the right finance option for your needs and situation.
Bridging Loan Costs and Fees
Bridging loans have various costs and fees which can add up to the overall cost of the loan.
Here are some of the common fees associated with bridging finance:
- Interest Rates: Rates are higher than standard mortgages and expressed monthly.
- Arrangement Fees: A one off fee charged by the lender for arranging the loan. 2% of the loan amount is standard.
- Valuation Fees: Lenders charge these fees to value the property being used as security.
- Exit Fees: Some lenders charge exit fees when the loan is repaid. These fees are 1-2% of the loan amount and are to cover the lenders costs of closing the loan.
- Legal Fees: You will be required to pay the lender’s legal fees, as well as your own.
Mortgage Costs and Fees
Here are some of the common fees associated with mortgages:
- Interest Rates: Mortgage interest rates can vary a lot, depending on the lender, loan amount and loan term. These rates are lower than bridging loans as they are long term and lower risk.
- Arrangement Fees: A one off fee charged by the lender for arranging the loan, 0.5-1% of the loan amount. This covers the administrative costs of setting up the mortgage.
- Valuation Fees: Lenders charge these fees to value the property being purchased.
- Early Repayment Charges: If you repay your mortgage early you may be charged early repayment charges. These fees are 1-5% of the loan amount and are to cover the lenders loss of interest income.
- Broker Fees: If you use a broker to arrange your mortgage you may be charged broker fees. These fees are 0.5-1% of the loan amount and are for the brokers services.
- Legal Fees: You need to pay for your own solicitor.
Repayment Structures
Repaying a bridging loan is very different to repaying a mortgage.
With a mortgage, most people choose a repayment loan, where you make monthly payments of interest and capital. This spreads the cost of repayment over a long period which is manageable for most borrowers.
Bridging loans don’t require monthly repayments.
You can ‘roll up’ the interest and pay it all at the end of the term along with the original loan amount. This can help with cash flow but the interest compounds over time and can increase the total cost.
Some bridging lenders offer the option to service the interest monthly which can reduce the final repayment amount.
When is a Bridging Loan Worth the Extra Cost?
Despite the extra cost, a bridging loan can be a good financial move in the following situations:
Property auctions
When you need to complete a purchase within 28 days a bridging loan can give you the flexibility and speed you need.
Breaking a property chain
If you’ve found your dream home but haven’t sold your current property a bridging loan can secure the new property without losing it to another buyer.
Property refurbishment
When a property isn’t mortgageable a bridging loan can fund the purchase and refurbishment before selling or refinancing to a traditional mortgage.
Commercial property
Bridging loans are also good for commercial property purchases especially when urgent financial needs arise.
In the fast moving UK property market especially in hotspots like London and the South East the speed of a bridging loan can be very valuable. It could be the difference between getting a below market value property and missing out.
For example one of our clients used a bridging loan to purchase a probate property in North London at 20% below market value. The speed of the bridging loan allowed them to complete the purchase quickly and after some light refurbishment they refinanced to a buy to let mortgage and made a good profit.
Factors Affecting Loan Costs and Rates
Several factors can impact the cost of both bridging loans and mortgages:
- Loan to value (LTV) ratio: Lower LTVs get better rates.
- Credit score: Less important for bridging loans but a good credit score can get you better rates for mortgages. Also your credit history plays a big part in determining your eligibility for bridging loans. Bad credit borrowers can still qualify but may get higher interest rates.
- Property type and condition: Non standard properties or properties in poor condition may get higher rates.
- Economic factors: Bank of England base rate and overall economic conditions affect both bridging and mortgage rates.
For both types of loan, if you can put down a larger deposit to reduce the LTV you’ll get better terms.
Making the Right Choice
Often, circumstances will dictate which direction you go in:
If the person selling a property needs you to complete on the purchase within the next three weeks, you will undoubtably need to fund it with a bridging loan.
If you need to raise some capital quickly to pay a VAT bill, then a bridging loan would be preferable.
Maybe your financial accounts are not quite ready but you still need to borrow some money. A non-status bridging loan can help with that.
Or raising the money to buy an undeveloped plot of land. Yes, there are bridging loans for land.
Are Bridging Loans More Expensive?
Yes.
But they offer a service that cannot be matched by long-term finance.
Need some help?
If you need a short-term bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To speak with a specialist broker, please call us on 020 3556 9137
