Within the formal written offer of a bridging loan, the loan is often referred to as a mortgage. The reason for this is that there are many similarities that occur between the two, and in essence, they are basically the same thing.
Bridging loans are secured as a charge on commercial and residential property or land within the UK in the same manner as a mortgage.
Some of the main differences, however, are:
- Bridging loans can be obtained without the requirement to make monthly payments, whereas with a standard mortgage, monthly payments are always required (this does not include an equity release mortgage, which is available only to those over 55). The less stringent income requirements allow bridging loans to be taken by clients who, for whatever reason, cannot show or prove the income needed to make monthly payments. Possible reasons for this lack of income proof could be because the clients are retired and are in the trap of being? cash-poor but asset-rich, the client is self-employed but without proper proof of income, the client has a minimum income, but the reason for the bridging loan will put them in a better financial situation, etc.
- The maximum term of a regulated bridging loan is 12 months (18 months for an unregulated loan), whereas with a mortgage, the standard minimum term is usually 5 years.
- Credit blips can be acceptable for bridging finance, provided a suitable exit route is proved, whereas only very minimal adverse credit is acceptable for mortgage finance, and only with a very small selection of lenders.
- Mortgages are virtually always taken on a 1st charge basis and on one property, whereas bridging finance is much more flexible and can be attained as either a 1st, 2nd, or 3rd charge and on multiple properties if required.
- Bridging finance, in certain circumstances, can be used for the purchase or refinance of partly completed and/or defective properties as well as land with or without planning, whereas a mortgage, with the exception of niche products such as self-build mortgages, is virtually always used for the purchase or refinance of fully habitable properties, which include those having kitchens and bathrooms.
- Bridging finance is often used for a wider range of loan sizes, starting at L10,000 and with no limits, and also for a much wider range of uses and scenarios.
The main consideration of any lender before allowing a client to take out a bridging loan is how the money will be repaid. Only if lenders are fully satisfied that the exit route is genuine and plausible will they allow a loan to commence.