There are many different kinds of loans out there, all of which have their own conditions and unique features which make them suitable for different situations. Understanding the advantages and disadvantages of different loan types can help you to choose the right type of loan for your circumstances.
In this blog, we explore the potential benefits of a bridging loan compared to other loan types.
Flexibility
One of the biggest factors in choosing bridging finance over another kind of loan is the flexibility bridging loans offer. While many loan types, including mortgages, are bound by strict rules and calculations that affect how much you can borrow, bridging loans can be much more accommodating. With the right underwriter, the terms of a bridging loan can be adapted to suit your situation.
The application process itself also offers flexibility, as the structure of a bridging loan means you can typically avoid lengthy credit checks. Instead of having your financial history examined, you provide proof of an exit strategy (i.e. how you intend to pay back the loan money and any interest and charges accrued).
On top of that, mortgage loans are often subject to checks on the property used as security – in most cases, the property being bought. Some properties have issues that can make them hard to sell to homeowners, such as structural problems or a lack of bathroom or kitchen facilities. These are often ineligible for a mortgage loan because the lender sees them as too difficult to get their money back on – but bridging loans work differently.
This can mean that bridging finance can be open to those who might not be eligible for other types of loans, whether that’s as a result of their financial situation or the kind of property they’re trying to buy. For example, a property developer might want to buy homes that have no bathroom or kitchen so the building can be renovated and sold for a profit.
Security
A bridging loan is all about providing financial security where it’s possible you might be left high and dry by other income sources. For example, if you’re in a property buying chain and the sale of your old property falls through, you might find yourself suddenly short of funds for buying a new property.
That’s why this kind of loan is called a bridging loan. It’s the difference between making a leap of faith and having a strategy in place to support you in your purchase.
But bridging loans aren’t just for emergency situations like a house sale falling through. They can also be used as a form of pre-emptive support, allowing you to make your purchase now and hold off on selling your old property until you’re offered the price you want.
Speed
One thing a bridging loan is renowned for is its agility. With a mortgage, it can take up to three months to get all the paperwork sorted, including the legal proceedings, and the funds released. With bridging finance, you could have your funds within a few weeks at the latest – and if you need the money even sooner, you can browse specifically for fast bridging loans to suit your needs.
This can allow property investors to be more flexible when it comes to making purchasing decisions, knowing they’ll be able to access the necessary funds sooner rather than later. This means a developer could use bridging finance to buy a property during a flash sale when asking prices are slashed, paying a lower purchase price as a result.
Loan size
With bridging loans, you can usually expect to be able to borrow up to 75% of the value of the property you’re using as security, although some lenders will allow you to borrow more. The financial value of a bridging loan can range from £25,000 to millions of pounds.
In contrast, some mortgages allow you to borrow up to 95% of the value of your property, but the downside is that your eligibility for that amount depends on your income. For a mortgage, you can usually only borrow up to 4.5 times your salary, meaning your loan value could be capped at a much lower amount than a bridging loan could provide.
All in all, both mortgages and bridging loans can be useful for different situations, so it’s important to weigh up your options before making a decision to ensure you apply for the best kind of finance for your circumstances. While mortgages are more well-known, bridging finance can be a handy tool for those who understand how this kind of loan works.
