Considering financing options for a high-value property purchase? This article will help you understand the differences between traditional mortgages and bridging finance, and which loan type may best suit your needs.
Purchasing prime property requires careful due diligence, and if a cash purchase is not feasible this includes considering which loan type would be most suitable and aligned with your investment strategy.
There are various loan facilities that are available for real-estate purchases, but two of the most common products are traditional mortgages and bridging finance, which we'll explore in greater detail below.
Traditional mortgages
Traditional mortgages usually provide long-term financing for residential and other real estate purchases and are extended over a long-term period, typically between 15 to 30 years. Mortgages are also used to fund home improvements and, in some cases, to consolidate debts.
Bridging finance
Bridging finance, also known as a bridge loan, is a flexible short-term loan used for various purposes where quick access to funds is needed and has a maximum duration of three years. One of the leading uses of bridging finance is to address property chain breaks, enabling the purchase of a new property before selling an existing one. Bridging finance is also useful for accessing equity before refinancing with another lender, for purchasing property at an auction with a short settlement period, or for financing the renovation of a property before selling it.
Read more in our recent article: What is bridging finance?
Both of these loan types offers distinct advantages and disadvantages, so it's important to understand the key differences and to carefully assess the risks and benefits in each case.
Generally, traditional mortgages are a good financing solution for long-term home ownership as they usually have lower interest rates than short-term loans. They also tend to offer stability and predictability over the long haul. Fixed-rate mortgages have a set interest rate throughout the loan term, offering a reasonably predictable repayment plan.
That said, some lenders may allow payment schedules to be revised and the loan to be refinanced, so there may be some leeway to adjust the terms to suit your financial situation or circumstantial changes.
Another benefit is that, over time, regular payments contribute to building equity in the property. This can be accelerated by putting down a deposit or paying more than the minimum monthly instalment.
The mortgage application process is typically lengthy, involving extensive paper work and stringent qualification criteria, and approvals can take a considerable amount of time too.
Another potential "con" is that mortgages generally offer limited flexibility:
As mentioned, refinancing the loan is possible in some cases, but this would likely incur additional costs. Similarly, early repayment of the loan can result in penalties. Additionally, while it is possible in some cases, accessing equity may be restricted based on the lender's terms.
Banks also tend to be reluctant to extend mortgages outside of their jurisdiction, leading to geographical limitations.
Perhaps the most distinct feature of bridging finance is the pace at which it can be secured. Generally speaking, bridge loans have less stringent eligibility criteria compared with traditional mortgages and can be approved faster.
Rapid access to cash flow helps borrowers move forward with time-sensitive property transactions, such as real estate purchases, refurbishments or property auctions, while selling another asset or securing long-term financing. A bridge loan may be secured against the property being funded or another one.
The short-term nature of bridge loans can also be seen as a "pro". These loans might only last for a few weeks to a maximum of three years. They close the gap when quick access to cash flow is paramount and can be settled once another solution is in place.
Bridging finance also offers a significant amount of flexibility. These loans can be used across a variety of financial circumstances. Moreover, they are not typically restricted to a particular geographical location.
The interest rates associated with bridge loans are typically higher than traditional mortgages. Extra fees associated with bridging finance, such as arrangement and valuation fees, legal costs and exit fees, also tend to be higher than those linked to mortgages which can lead to increased overall costs.
While the short-term nature of bridge loans may be suitable in some cases, this may become a "con" if it doesn't align with your requirements. The need to settle the loan in a short period of time may come with additional financial pressure, especially if you don't have a clear exit strategy in place or if plans change or delays come into play, increasing the risk of default.
Before making a decision, it's important to consider:
We recommend working with the appropriate team of professionals, including your financial advisor to help you consolidate your financial strategy, a trusted realtor to give you the necessary insights related to the property transaction, and a specialist broker to guide you in understanding which loan type would be most appropriate for your circumstances.
If it's bridging finance you need, we'll help you bridge the gap!
At Global Bridging Finance, we are committed to helping you secure the best loan available. We are experts in sourcing bridge loans and short-term finance that are tailored to your individual circumstances.
We go the extra mile to get you the bridge loan you need, right when you need it. We don't waste any time on securing the most suitable bridging finance deal, so you can also move quickly on your property transaction.
Get in touch today and speak to one of our expert brokers. We're here to help!
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