Home Loan vs. Mortgage: What’s the Difference?
Home loans and mortgages are almost always interpreted as the same thing.
You could argue that a mortgage is a type of home loan, given that it is a loan used to purchase a home. There are significant differences between the two in terms of their functions and intended applications.
A home loan is more restrictive with regard to how the funds can be used; a home loan can exclusively be used to cover the costs of buying or constructing a home. Conversely, a mortgage can be used for absolutely any purpose if the applicant meets the required criteria for the loan.
In addition, there are various different types of home loans that fall within the broader classification. Examples of this include commercial property loans, non-residential premises loans, construction loans, top-up home loans, home extension loans, home renovation loans, and so on.
Some types of home loans can be taken out alongside a mortgage as a means of funding a specific project. For example, you could take out a home extension loan to cover the costs of an extension. However, it would be expressly forbidden for the funds to be used for any other purpose. If you were to extend your current mortgage to generate capital, it could be used for any legal purpose.
The main differences between home loans and mortgage loans
To help clarify the confusion, what follows is a concise summary of the main properties of the two types of loans and how they differ:
Home loans
- A home loan is typically issued exclusively for the purchase or construction of a home and cannot be used for any other purpose.
- Home loans are typically issued with a comparatively high LTV, often covering as much as 90% of the property’s purchase or construction costs.
- Cost-effectiveness varies significantly from one lender to the next; interest rates on home loans can be lower than those of a conventional mortgage.
- Borrowing costs can also differ significantly between lenders, typically including an initial processing fee of 0.8% to 1.2% of the total value of the loan.
- Flexible repayment terms are available over the course of anything from 10 to 30 years, in accordance with the preference of the borrower.
Mortgage loans
- The main difference with a mortgage is that the funds can be used in any way the borrower likes. The loan is issued using their home as collateral in the same way, but there are fewer restrictions placed on how the money can be spent.
- A typical mortgage will be issued with an LTV of around 70% to 80% of the market value of the property. Some lenders have begun once again offering mortgages with an LTV of 90% or even 95% to those who meet the required criteria.
- There are major differences from one lender to the next, but the interest rate payable on a mortgage is usually around 1% to 3% higher than that of a comparable home loan.
- The same also applies to processing fees, which, with the typical mortgage, will be around 1.5% of the total value of the loan.
- With a mortgage, it is usually easier to extend the size of the loan and borrow more money should the initial amount be insufficient to cover all costs and requirements.
Whatever your objectives for the funds you need, it is important to seek independent broker support before applying. This will help you not only determine the most cost-effective option available but also get the best possible deal from an extensive panel of specialist lenders.
If you would like to learn more about the differences between mortgages and home loans, contact a member of the team today.
Renovations Set to Get More Expensive as Building Material Costs Skyrocket
Property renovation and repair bills are expected to climb significantly over the coming months as builders warn of a major shortfall in the availability of even the most basic supplies. As a side effect of the UK’s booming housing market, builders are struggling to get hold of everything from roof tiles to timber to bags of concrete.
Many have likened it to entering a supermarket to find empty shelves, with the availability of building essentials having totally dried up in some regions. Rather than relying on a stockpile of products to allow projects to be completed, builders are increasingly buying what they need at the last minute, if and when the products they need are available.
As a result, there has already been an increase of around 10% in the costs of building materials, though those in shorter supply are becoming even more expensive. This means that homeowners considering property improvements or urgent repairs over the coming months can expect significantly higher costs as contractors look to augment the prices of building materials.
Seven months of price increases
Timber and steel prices in particular have reached highs not seen for some time, with the IHS Markit/CIPS UK survey having indicated no less than seven consecutive months of price increases to date.
According to Noble Francis, economics director at the Construction Products Association, steel and copper prices have increased by up to 40% over the past six months, while the average price for timber has increased by as much as 80% in some regions.
Even the most basic supplies like varnishes and paints are up to 30% more expensive than they were when compared to the previous year, while the price of polypropylene is up by 60%.
As the vast majority of all building materials used in the construction sector are produced domestically, manufacturers and suppliers have limited on-hand inventory to fall back on.
“You can’t point the finger at anybody because so many different materials have availability issues right now. People who have been in this industry for over 30 years say they’ve never seen anything like it,” commented John Newcomb, the chief executive of the Builders Merchants Federation (BMF).
Another COVID-19 casualty
Many builders and contractors are now facing the prospect of heavy delays in project completion times, with lead times for concrete having increased to as much as three months. Roofers in particular are expected to struggle for the foreseeable future, with raw material costs having increased by around 50% to date.
The issue has been caused by a variety of contributory factors, though it has been greatly exacerbated by the temporary closures of many factories, mills, and production facilities and throughout three consecutive lockdowns. While the government showed lenience with regard to requirements for the construction sector to cease operations, producers are still struggling to catch up with pent-up demand for materials and supplies.
“We’re fighting hand-to-mouth to make sure materials are getting through. It’s just that people have to wait longer, and, of course, raw material prices are going up, so they are having to pay more,” said Newcomb.
“The jobbing builder has traditionally gone into a merchant and said I want three of this and six of that; those days are gone.”
“The key thing is not to go in expecting you can turn up at the door and just take those materials away, because that is not going to happen.”
BridgingLoans.co.uk Once Again At The Forefront
UK Property Finance has again been at the forefront of one of the latest trends that require bridging finance instead of more traditional forms of finance to enable it to occur. The speculative trend of purchasing land without planning permission and then as quickly as possible obtaining planning permission to greatly uplift the valuation, therefore enabling the land to either be sold at a substantial profit or built out using property development finance, has seen huge growth over recent years.
Bridingloans.co.uk has had two recent cases that highlight this scenario, each of which has had entirely different outcomes:
- 1) A client wanted to purchase land without planning in Liverpool for £40,000. He had experience making similar purchases throughout the country and obtaining planning permission. This happened with this investment, and he quickly and subsequently increased the valuation fourfold, allowing the possibility of standard development finance to be obtained. At this stage, the client wanted to further increase the valuation of his investment asset by building out the properties mentioned within the planning permission, and as such, we raised the finance needed for him to complete four flats, which were sold for a large and substantial profit.
- 2) Our second client already owned a relatively low-value, unencumbered plot of land valued at £100,000. The site was close to other land that had recently been granted planning, and our client wanted to do the same and increase the value of his land. His problem, however, was that he had used all of his own available funds to purchase the land, and he also did not have the required expertise to enable him to obtain planning by himself. We raised sufficient funds to allow the client to recruit the services of suitably skilled individuals who obtained planning permission, and the land was now worth over £400,000. As our client had neither the skills to build out the properties nor the inclination to do this, he followed his initial intention, which was to sell the land once the valuation had increased with the planning. He did this with ease and made a life-changing profit on his investment.
As both cases initially started with the need to raise funds on land without planning permission, the number of lenders available for this was virtually non-existent. We, however, have very close relationships with flexible lenders dealing with the full range of products required in the UK market. As the rates we obtained were similar to those available from many bridging loan lenders on standard bridging cases, both clients managed to obtain market rates for their projects, and completion occurred in less than 2 weeks from inception. One of the clients even had previous credit issues, which we managed to get accepted.
How Much Can I Borrow on a Bridging Loan?
Unlocking financial flexibility
In the dynamic landscape of real estate and property investment, timing is often a critical factor. Whether you’re looking to secure a new property before selling your current one or investing in a time-sensitive opportunity, bridging loans offer a flexible and swift financing solution. One of the key questions on the minds of borrowers is, “How much can I borrow on a bridging loan?” In this blog post, we delve into the details to provide insights on borrowing limits and considerations when exploring this financial avenue.
Understanding bridging loans
Before diving into the borrowing limits, let’s take a moment to understand what bridging loans are. Bridging loans act as a short-term financing option, typically used to bridge the gap between the purchase of a new property and the sale of an existing one. These loans are designed to be repaid quickly, often within 12 to 18 months, and are secured against the borrower’s property or a combination of properties.
Borrowing Limits:
To determine how much you can borrow on a bridging loan, several factors come into play. Here at BridgingLoans.co.uk, we believe there are a few key considerations:
Loan-to-Value (LTV) Ratio: The LTV ratio is a crucial factor that influences the amount you can borrow. It represents the percentage of the property’s value that the lender is willing to finance. Bridging loans often have higher LTV ratios compared to traditional mortgages, sometimes reaching up to 75–80%.
Property Valuation: The value of the property or properties being used as security is a pivotal factor. A professional property valuation is typically required to determine the loan amount. Bridging lenders may use different methods to assess the value, and it’s essential to have a clear understanding of this valuation process.
Exit Strategy: Bridging loans are short-term solutions, and lenders are keen on understanding your exit strategy—how you plan to repay the loan. This could involve selling the property, refinancing with a traditional mortgage, or another viable repayment method. A well-defined exit strategy can positively impact the borrowing amount.
Credit History and Financial Status: While bridging loans are primarily asset-backed, lenders may still consider your credit history and overall financial status. A strong credit profile can enhance your borrowing capacity and may result in more favourable terms.
Interest Rates and Fees: It’s crucial to factor in the interest rates and fees associated with bridging loans. These costs can impact the overall amount you’ll need to repay. BridgingLoans.co.uk recommends carefully reviewing the terms and conditions of different lenders to find the most suitable option for your financial situation.
Bridging loans offer a valuable tool for property investors and homeowners seeking short-term financing solutions. The amount you can borrow on a bridging loan depends on various factors, including the loan-to-value ratio, property valuation, exit strategy, credit history, and the terms offered by the lender.
For personalised advice and information tailored to your specific circumstances, it’s advisable to consult with financial experts and utilise reputable sources such as BridgingLoans.co.uk. By understanding the intricacies of bridging loans and considering the factors mentioned, you can make informed decisions to meet your financial goals and navigate the exciting yet challenging world of real estate investment.
Exploring the Different Exit Strategies for Bridging Loans
Bridging loans have ballooned in popularity over recent years due to their flexibility and the fast approval process that comes with them. This has made bridging finance the preferred choice for property buyers and investors. These short-term loans serve as a lifeline for those who need quick funds to bridge the financial gap during property transactions. Although gaining a bridging loan can be relatively easy, it’s crucial to have a well-thought-out exit strategy to ensure a smooth transition when the loan term ends; this is usually anywhere up to 12 months.
Conventional mortgage refinancing
One of the most common exit strategies for bridging loans is to secure a traditional mortgage to replace short-term financing. This option works best when the borrower anticipates that they will have improved their creditworthiness and property value during the bridging loan term. Conventional mortgage refinancing offers longer repayment periods and lower interest rates, providing you with financial stability for the future.
Property sale
Selling the property is another exit strategy that borrowers often employ. This approach is suitable for individuals who initially acquired the property solely for investment purposes or when circumstances change and the property is no longer needed. By selling the property, borrowers can repay the bridging loan in full. Any remaining profit can be reinvested in other ventures.
Cash reserves
Borrowers who have access to liquid assets or cash reserves can use them to pay off the bridging loan. For those who are in this situation, this is the best option. This option avoids additional debt and the potential stress associated with finding alternative financing. By using cash reserves, borrowers can swiftly clear the loan, allowing them to focus on their property goals without unnecessary financial burden.
Refinance with a new bridging loan
In some cases, borrowers may find that they need to extend their bridging loan due to unforeseen circumstances or delays in their exit plans. In such situations, refinancing with a new bridging loan can be an option. This approach provides borrowers with more time to complete their exit strategy, although we strongly advise you to carefully assess the costs and terms of the new loan.
Equity release
If the property has appreciated significantly in value during the bridging loan term, borrowers may consider an equity release as an exit strategy. Equity release allows homeowners to access a portion of their property’s value while continuing to live in it. This option enables borrowers to pay off a bridging loan and access funds for other purposes without selling the property outright.
Top Considerations for Choosing the Right Bridging Loan Term
Bridging loans have the potential to be a flexible, affordable, and accessible solution when you need a short-term financial boost in a hurry. Once typically associated with commercial borrowers and strict business applications, recent years have seen more everyday borrowers consider these fast-access funding solutions than ever before.
But while it can be comparatively straightforward to apply for and receive a bridging loan, it is not a facility to take out without careful forethought. Careful consideration of several key factors is essential to ensuring you make the right decision, one of which is the most appropriate term for your bridging loan.
It’s possible to take out a bridging loan over a period of anything from a couple of weeks to around 18 months. Interest and borrowing costs are typically ‘rolled up’ into the final loan balance, with no monthly repayments required in the interim.
The question is, how do you know what bridging loan term is right for you? More importantly, what are the most vital considerations you need to factor in prior to deciding when you will pay your lender back?
Six essential bridging loan term considerations
- The strength of your exit strategy
A core component of any bridging loan is the exit strategy, i.e., how and when you plan to repay the loan. Whether it’s the sale of a property or expected income from a business or inheritance, a solid exit strategy reassures lenders about your repayment capabilities. However, if your exit strategy isn’t set in stone or fails to generate the expected revenues when that time comes, a longer term may be essential to enable you to raise the money needed to repay your loan.
- Monthly interest payable
Considering the interest payable each month on your bridge loan is vital. You will typically find that while the monthly interest rates on a longer-term bridging loan are lower, what you end up repaying is significantly higher. It’s the same with almost all types of personal and commercial loans: longer repayment terms equate to higher overall borrowing costs. In addition, lenders often show preference to borrowers who intend to repay their loans as quickly as possible, which are considered lower-risk transactions.
- Penalties for missing deadlines
Missed or late payments can result in penalties that can significantly impact your total repayment, along with your credit rating. A shorter bridging loan term might sound appealing initially due to the potential to make savings, but it’s important to consider your repayment capacity before committing. You’ll have a fair amount of freedom when it comes to determining your own preferred repayment date, but the last thing you want is to realise subsequently that you did not give yourself enough time.
- Issues that could affect the ability to repay
Unexpected issues such as market downturns, property sales that fall through, or business performance problems could affect your ability to repay. Assessing these potential risks in advance is essential; all potential outcomes should be considered where your exit strategy is concerned. Ideally, you should be looking to choose a bridging loan term that provides something of a buffer in the event that you face any unexpected yet inevitable issues along the way.
- Potential savings with prompt repayment
Where possible, it’s worth placing emphasis on the potential savings of repaying as soon as possible, with a shorter term. Though this means less time to come up with the full balance and a potentially higher monthly rate of interest, the total amount you pay will always be lower when you repay your loan as promptly as possible. Again, you need to ensure you allow yourself a realistic period of time to raise the funds needed to repay your debt.
- Early repayment options without penalties
Repaying earlier than agreed can save you a substantial amount in interest payments and overall borrowing costs. However, not all bridging loan providers offer penalty-free early repayments. Check directly with your provider to confirm if this is an option. Depending on your lender’s flexibility, you could potentially choose a longer-term bridging loan, but with the aim of repaying it earlier if doing so proves to be feasible.
Renovating Old Structures: Bridging Loans for Historical Conversions
Transforming historical buildings is a thrilling and demanding venture that calls for exceptional skills and expertise. While it results in a remarkable metamorphosis that conserves a fragment of the past, it also necessitates considerable financial investment. That’s where bridging loans come into play, a popular funding alternative for property conversions.
This article delves into the intricacies of bridging loans for property conversions, with a specific focus on the conversion of historical buildings.
Understanding bridging loans
Before delving into the specifics of employing bridging loans for property conversions, it’s vital to grasp their essence. Bridging loans are a short-term financing solution that enables borrowers to swiftly secure funds, typically within a matter of weeks. These loans commonly bridge the gap between property purchases and long-term financing or cover the expenses of renovations and other outlays. Secured against the property itself, these loans empower lenders to sell the property in the event of a loan default, recouping their investment.
Bridging loans for property conversions
Historical buildings possess an unmatched allure and charisma that contemporary structures cannot emulate. Converting such buildings to serve new purposes necessitates meticulous planning, reflection, and a substantial financial commitment. Herein lies the value of bridging loans, as they provide rapid access to funds that can be used for conversion expenses.
One of the advantages of employing bridging loans for property conversions lies in their adaptability to the borrower’s specific needs. For instance, the loan structure can encompass the property’s purchase cost as well as renovation or repair expenses. Furthermore, bridging loans can be tailored to offer repayment flexibility, which proves advantageous for lengthy conversion projects.
When contemplating a bridging loan for a historical property conversion, it is imperative to collaborate with a lender well-versed in this domain. Converting historical buildings mandates a unique set of skills and knowledge, including an understanding of preservation and restoration techniques, along with adherence to local regulations and requirements.
Preserving heritage
Effecting a transformation in a historical structure necessitates a delicate equilibrium between preserving the property’s historical character and adapting it for modern usage. This endeavour poses challenges, as restrictions may govern alterations to the building. Nonetheless, with the right approach and expertise, a successful conversion can uphold the building’s historical significance while rendering it functional for contemporary purposes.
A pivotal element of a prosperous historical property conversion lies in assembling a team of experts capable of guiding and advising throughout the process. This team should encompass architects, engineers, and contractors well-versed in working with historical structures. Moreover, it is crucial to collaborate with a lender who comprehends the distinctive obstacles posed by historical property conversions, offering tailored financing solutions to suit project-specific requirements.
Converting a historical building into a new functional space is a gratifying and demanding undertaking, necessitating meticulous planning, expertise, and financial backing. Bridging loans serve as an exceptional financing avenue for property conversions, providing swift access to funds and repayment flexibility. When contemplating a bridging loan for a historical property conversion, it is essential to partner with a lender experienced in this realm and assemble a team of specialists capable of guiding and advising throughout the process. With the right approach, a successful historical property conversion can preserve the building’s heritage while rendering it relevant for contemporary purposes.
Criteria for Bridging Loans in Northern Ireland
With the support of an experienced broker, organising a bridging loan in Northern Ireland can be fairly straightforward. Even so, you still need to understand the eligibility criteria that apply to bridging finance in general before submitting an application for a Northern Ireland bridging loan.
What is a bridge loan?
A bridging loan is a specialist short-term secured loan that can be organised and accessed much faster than any comparable high-street loan. As the name suggests, bridging finance is used to “bridge” a temporary financial gap and is typically repaid within a period of one to 12 months.
With all the essential paperwork in place, a bridging loan can be authorised in as little as a few working days. This makes it an ideal facility for time-critical purchases and investment opportunities, such as purchasing properties at auction.
Bridging finance is a popular tool for property developers and investors looking to fund short-term projects as affordable as possible. With monthly interest as low as 0.5% (sometimes less), bridging finance can be hugely cost-effective when repaid promptly.
There are also no limitations placed on how much can be borrowed (based on the value of the assets used as security for the loan) or how the funds can be allocated after being received.
What are the main eligibility criteria for Northern Ireland bridging loans?
Eligibility for bridging finance is established on the basis of two main criteria:
- Security: The applicant must be able to provide assets of value to cover the costs of the loan in the form of viable security. This usually takes the form of their home or business property they own but can also be other assets of value like business equipment, vehicles, jewellery, and so on.
- Exit strategy: This refers to a workable and reliable plan for repaying the loan. Bridging finance is repaid by way of a single lump-sum payment at a later date, complete with interest and fees. The applicant must provide evidence that they have a robust exit strategy in place, such as the sale of a property or an owed inheritance payment.
Other than this, the qualification criteria for bridging finance are fairly relaxed. You do not need to provide formal proof of income, nor is your employment status of any major relevance.
It is even possible to qualify for bridging finance with poor credit or a history of bankruptcy. All that matters to the lender is your capacity to repay the loan in full and on time, along with the provision of security as an ‘insurance policy’ against non-payment.
What can I use a bridging loan for?
If you qualify for a bridging loan, you can use the funds for any legal purpose whatsoever. Just a few of the more popular applications for bridging loans include business financing, property investments, development financing, land purchases, auction property purchases, home improvements, property conversions, and more.
Irrespective of your requirements, it is important to ensure that you shop around to get the best possible deal on your bridging loan. This is especially true if you have any past credit issues, which may affect the competitiveness of the deal you are offered. At UK Property Finance, we work with an extensive panel of more than 300 lenders to source high-quality, low-cost bridging loans for all purposes. For more information on the criteria for bridging loans in Northern Ireland or to discuss your requirements in more detail, call anytime for an obligation-free consultation.