Introduction
There are a number of different types of property finance available to borrowers, each with their own characteristics. It is important to understand how each of these options works and when they should be used.
In this article we will discuss bridging loans finance and how it compares to a traditional mortgage.
What is Bridging Finance?
A bridging loan is a short term facility that gives a borrower fast access to finance. Bridging finance facilities will often have a specific purpose (as agreed by the lender and borrower) and will need to be repaid within a defined time frame. In real estate, bridging loans are often used to fund the purchase of a new property prior to the sale of the existing property. This allows borrowers to take advantage of prior to receiving the sale proceeds from their current home.
Bridging loans are a quick and easy way for a borrower to secure finance in a short period of time. The interest is typically rolled up, meaning the borrower does not need to service the interest on a monthly basis, and can instead pay it in one payment at the end of the facility. Mortgage bridging loans are often used to bridge the gap between an immediate expense and a future influx of cash. As a result, bridging loans often have short terms (between 0-24 months). In addition to this, bridging loans are often associated with higher interest rates.
Advantages Of Bridging Loan
Bridging loans offer the borrower fast access to finance in order to take advantage of a time sensitive opportunity. Given that property bridging loans are dependent on a future event they have a much faster application process and can typically be acquired in less than a month.
In addition to this, bridging loans can offer high LTVs to borrowers, allowing them to release the maximum amount of equity from the property. The shorter terms of bridging loans are another advantage, as they give borrowers the required flexibility without committing to a long-term mortgage.
Disadvantages Of Bridging Loan
As previously mentioned, there are a number of disadvantages associated with bridging loans. Firstly, the short term bridging loans means that the borrower is restricted in terms of exit options.
For example, a bridging loan with a term of a couple months would not afford the borrower ample time to plan another exit, should the initial exit fail. In addition to this, the high interest rates associated with bridging loans makes them a very expensive option when compared with traditional mortgages.
What is a Traditional Mortgage?
A traditional mortgage is a financial facility offered by banks or specialist lenders which allows borrowers the ability to purchase a property without having to pay the full price in upfront cash. Mortgages afford borrowers the option of purchasing a property on credit from the bank. The borrower will then pay the lender an amount each month in compensation for the amount borrower. It is common for mortgages to be interest only, meaning that borrowers pay the lenders an amount equal to the interest accrued each month. At the end of the loan term, borrowers will pay the lenders the full amount that was initially borrowed.
Mortgages may also be amortizing, meaning that the borrower makes payments every month that are equal to the interest accrued as well as an amount that will pay down the initial figure borrowed. Traditional mortgages are long term facilities lasting for 5+ years. Traditional mortgages are also associated with lower interest rates than bridging loans as they are longer term and less risky for the lender. Given that the lender will have a charge over the borrower’s property, the lender can repossess the borrower’s property in the event of nonpayment.
Difference Between Bridging Loans And Traditional Mortgages
It is important to understand the differences between bridging loans and traditional mortgages as they have different applications. Bridging loans are ideal for short term financing requirements with a defined exit whereas mortgages are ideal for long term financing requirements.
Furthermore, where bridging loans have high interest rates, traditional mortgages have comparatively low interest rates. Mortgage brokers can assist in helping their clients to understand which facility is best for them and what is required in order to apply. With this in mind it is crucial to consult with your mortgage broker prior to entering into any obligations.
Conclusion
Bridging loans have a number of different applications to traditional mortgages. Mortgage brokers can help borrowers understand which facility is best for them.