Bridging loans vs traditional mortgages: which one is right for you?

Congratulations! You’ve found a property you’re happy with. Half the battle is done. Now, for the sale to go through, you just need to decide which financing solution you’d like to leverage.

Whether you’ve found a plot of land at auction, or are moving into a new office building, deciding whether to use a bridging loan or a traditional mortgage to finance your new property might feel like a big decision. Here’s everything you need to know to help you make it.

What is a bridging loan?

As the name suggests, a bridging loan is a short-term loan designed to bridge the gap between finding a property and securing long-term funding.

Example: Company A is in property development. They’ve found a new building they’d like to acquire. They intend to make a few structural changes to the building over the next few months at which point they plan to sell the building on to new owners. They have written up a strategy and predict they will resell sometime in the next nine months; at which time they will repay the loan in its entirety. In this case, it would make sense for them to apply for a bridging loan.  

How do bridging loans differ from traditional mortgages?

Unlike bridging loans, limited company mortgages are designed to provide long-term funding, usually over the course of 15-35 years.

While both loans are made against the asset, when used to purchase commercial property, bridging loans tend to come through faster, have higher interest rates and are designed to support short-term development goals. Whereas traditional mortgages are generally expected to take a little longer to come through, have lower interest rates and are designed to support long-term property acquisition.

Example: Company B is a family-run bakery looking to acquire a second branch in a nearby town. They would like to spread the repayment of this property over the next twenty years. They don’t plan on selling this new branch for at least the foreseeable future, and they have informed the seller it may take several weeks for their funding to come through. In this case, a traditional mortgage might make more sense.

Example: The same bakery would now like to sell their current property to acquire a new storefront. They have found a store nearby that suits their needs, but it’s in a competitive location and they’d like to purchase it before the sale on their current property goes through to ensure they don’t lose out on the sale. They predict their current store will sell within the next three months. In this case, they might leverage a bridging loan first and then apply for a traditional mortgage once the sale of their current store goes through.

The pros and cons of bridging loans

Bridging loans are a popular choice for property developers and other businesses looking to secure speedy short-term funding. Some of the pros of bridging loans include:

• Speed: Bridging loans are a fast way to gain access to the finances required to purchase property. Bridging loans can sometimes be ready within 24-48 hours.  

• Less paperwork: Mortgages can be famously laborious to apply for, in contrast, bridging loans usually require less upfront paperwork.

Some of the possible drawbacks include:

• Higher interest rates: As bridging loans are considered short-term funding, they often come with higher rates when compared to a traditional mortgage. Higher interest rates can impact cash flow which can result in greater financial risk.

• Exit plan risk: Most bridging loans need to be repaid in full sooner than traditional mortgages. It’s important to consider what might happen if your exit plan falls through. You may still be liable to repay the loan.  

Traditional mortgages: benefits and drawbacks

Traditional mortgages can be a great way to close the deal on your new property, some of the positives include:

• Lower interest rates: As a long-term solution, traditional mortgages tend to come with lower interest rates when compared to bridging loans.

• More stability: Mortgages are usually spread over a long period, generally between 15-35 years. This can create more stability and means you don’t need to find new forms of funding or close a sale within the next year.

Some of the possible drawbacks of traditional mortgages include:

• Less flexibility: A mortgage is a long-term solution, which can result in less flexibility when compared to a fast financing solution like bridging loans.

• Longer approval process: Mortgages can take longer to come through than bridging loans, which can impact competitiveness with regards to any time-sensitive opportunities.

How to make the right decision for your business

Start by considering the length of time you will need this funding for. As a general rule of thumb, if you plan to pay back the loan within the next year or so, a bridging loan might be suited to you, whereas if you’re planning to pay the loan back slowly over the next two decades, a mortgage might make more sense.

Consider your specific circumstances, for instance, if you are a property developer with an exit strategy in place looking to close the acquisition on a competitive property quickly, a bridging loan might make more sense for you than if you’re a small, family-run bakery looking to open your second branch.

Lastly, speak to a few different providers to find out what you’re eligible for and what they’re willing and able to provide you with. The more information you’re armed with, the more secure you can feel in your final decision.  

Find commercial property financing with Funding Options by Tide

Whether you decide on a bridging loan or a traditional mortgage, with Funding Options by Tide, you can connect to 120+ lenders who may be able to assist in property financing. Use our brokerage service to compare lenders, deals, interest rates, and term lengths across a wide range of options until you find the financing option most suited to you.

Find a suitable lender to support your commercial property acquisition.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.