Technically speaking, bridging loans are secured loans in their own right. However, there are basic differences between a bridging loan and conventional secured loans. Bridging loans are used for a shorter period and do not require monthly payments, whereas traditional secured loans do require monthly payments and on average are taken over a much longer term. Term loans are loans requiring monthly payments over a set period or term.
All loans secured against land or property in the UK are classed as ‘mortgages’, a legal agreement between the lender and the borrower where the lender takes a legal charge on the title of the borrower’s security in return for the loan. This basically means that the security cannot be legally sold or refinanced until the secured loan is repaid in full, at which time the lender’s charge is removed from the title register.
Depending on requirements and personal preferences, you may find that either a bridging loan or a traditional secured loan is more suitable for your needs.
Traditional Secured Loans
The most common and conventional type of secured loan is a standard residential mortgage where a borrower uses the loan to help fund the purchase of a property in which they intend to live. In this case, the lender would have a priority or first charge over the property title and payments would be made monthly and over an agreed term until the loan plus generated interest are repaid in full. Once owned and prior to the initial secured loan being repaid, additional borrowing, if needed, can either be arranged via a remortgage or an additional secured loan known as a second charge loan. A second charge loan is also listed on the title register but ranks in importance lower than the first charge loan.
Secured loans are considered minimal risk to lenders as the lender has an insurance policy in the form of a legal charge over the borrower’s property or land assets. If the loan is not repaid in full and on time the lender will then have the option to take possession of the security, which can then be sold to recoup the loan monies owed. Following a repossession, the first charge lender receives payment in full before the second charge lender receives any payment from funds remaining. The borrower remains liable for any shortfall following the sale.
Organising a conventional secured loan can be complex and time-consuming. In the case of a mortgage or similar property loan, it could be several weeks or months before the underwriting process is complete. In addition, you may find yourself subject to extensive credit checks and scrutiny. Even though you are providing security in the form of land or property asset(s), your credit report could still impact your eligibility of obtaining a traditional secured loan or prevent you from accessing market-leading secured loans, as monthly payments are required with this type of loan and the lender will be worried about your track record of paying back.
Bridging loans were once niche financial products but are now slowly but surely gaining traction with both consumers and commercial borrowers. The primary difference between bridging finance and a traditional secured loan is the speed and simplicity with which the bridging funds can be released and that regular monthly repayments, unlike traditional types of secured and term loans, are not required.
Some specialist UK bridging lenders are very flexible when it comes to credit history. Even with those lenders that take a harsher line on poor credit, provided a suitable explanation can be given, it is often not the deal breaker it would be with more traditional types of secured finance, especially those requiring monthly payments. Provided the loan is satisfactorily covered by the security on offer, the security type is agreeable to the lender and the repayment vehicle or exit method to repay the loan is feasible, then all loans are normally considered. This enables much quicker and easier underwriting than with traditional secured or term loans.
When Bridging Loans Are Better?
Given the above, several common scenarios dictate when bridging loans may be preferable to conventional secured loans or term loans. A few examples would be:
- The borrower’s security is not considered acceptable by conventional lenders. Bridging specialists tend to be far more flexible by way of eligible assets and property. They will consider land, partly completed properties etc., as security. Whereas traditional secured loans or terms loans are generally only considered for fully completed properties. One exception to this rule would be a self-build mortgage.
- Any instance where the funds are required quickly, such as purchasing a property at auction.
- When the borrower would prefer to repay the loan in full as quickly as possible, rather than spreading the repayments over several years. Bridging loans tend to be arranged for shorter periods than are available with traditional secured loans or term loans and can often be repaid prior to the end of the agreed period without penalties.
- If the borrower’s credit history excludes them from conventional secured loans, requiring monthly payments.
- If a borrower’s provable income would not service repayments of a secured or term loan.
- All cases where the borrower’s application has already been rejected (perhaps repeatedly) elsewhere.
- When significant sums of cash are needed quickly, such as to cover urgent expenses or for rapid repairs/alterations to a property or to pay tax bills.
To conclude, bridging finance is generally quicker and easier to arrange than traditional secured term finance. However, depending on the circumstances, both bridging loans and conventional secured loans can represent exceptional value for money.