Bridging Loans vs Traditional Mortgages: Key Differences

Ever wondered what the single biggest difference is between bridging loans and traditional mortgages?

The answer is simple: every property buyer in the UK faces this exact same decision at some point in their life. After all, picking the wrong type of financing for your purchase can cost you thousands… or worse, mean you lose out on the property altogether.

The problem is, most people don’t understand the key differences between the two options. They end up picking the wrong one and either overpay for their property or miss time-sensitive opportunities.

This comprehensive guide breaks down absolutely everything you need to know about bridging loans versus traditional mortgages. Some of the differences will surprise you.

Let’s jump in.

What you’ll discover:

• Bridging Loans: The Basics
• Traditional Mortgages: What You Need To Know
• Timing: Which Is Faster?
• Cost: Are Bridging Loans More Expensive?

Bridging Loans: The Basics

Bridging loans are short-term finance solutions designed to “bridge the gap” between buying and selling property.

The key point to note is that bridging loans are not the same as regular, long-term residential mortgages.

Bridging loans accounted for a massive 48.7% of all property transactions in Q2 2023. This is up from 46.2% in Q1 and a huge increase year-over-year. This increase in market share is just a sign of how popular they’ve become with property investors and home buyers over the last few years.

If you’re new to bridging finance, here are the basics:

Think of a bridging loan as the financial equivalent of a sprint rather than a marathon. You need the money fast, take the bridging loan to fund your purchase, then pay it off as soon as your long-term mortgage comes through.

Don’t be fooled by the simplicity of the process though.

Calculating exactly what a bridging loan will cost you is key to making an informed decision. It’s recommended to use a Bridge Loan Direct calculator to get a clear idea of the actual cost before committing. The figures might surprise you – but that’s often the price you pay for speed and flexibility.

Traditional Mortgages: What You Need To Know

Traditional mortgages are the polar opposite of bridging loans in every possible way.

These are long-term residential loans designed to be repaid over 15-35 years.

Here’s the key thing most people think about when they choose a traditional mortgage over other options:

Low rates, stable monthly payments and as much time to repay the loan as you like. The trade-off is that everything is slower and takes much more time.

The traditional mortgage application process is the exact opposite of a bridging loan.

Buy-to-let landlords and house hunters have to go through the standard residential mortgage process. Long affordability checks, property valuations, lots of legal work, and masses of paperwork.

Which Is Faster? Bridging Loans vs Mortgages

Want to know the single most important difference between these two types of property finance?

It’s speed.

Bridging loans are arranged quickly, typically in 38 days on average during Q4 2024. It’s even possible to take out bridging loans in as little as 24-48 hours if you have all your paperwork in order.

The traditional mortgage application process? It takes a completely different amount of time.

On average you’re looking at 6-12 weeks to get a mortgage approved. If there are any issues, it can take even longer.

Think of it this way.

You might only have 28 days to complete when you buy a property at auction. A bridging loan is your only option. It’s impossible to get a traditional mortgage fast enough to work.

But if you’re a first-time buyer with plenty of time to save and hunt for properties, then a standard residential mortgage makes total sense.

Are Bridging Loans More Expensive? Interest Rate Reality Check

Let’s get real about what bridging loans and mortgages actually cost.

Interest rates on bridging loans are significantly higher than traditional mortgages.

Bridging loan interest rates are typically quoted between 0.65% and 1.5% per month. This means you’re looking at an annual cost of between 7.8% and 18%, sometimes more depending on your individual circumstances.

Compare this to traditional mortgage interest rates of around 4-6% per year (depending on market conditions and your credit score).

Now here’s the thing most people don’t think about when they compare interest rates like this.

It’s important to note that the interest rates on bridging loans are for short-term finance, typically less than 12 months. You might be paying more for the loan compared to a mortgage, but you’re only paying that cost for a few months not decades.

Sometimes paying more to achieve your goals in a fraction of the time is the smartest financial move.

Bridging Loans vs Mortgages: Application Process

The process to apply for a bridging loan and a mortgage are polar opposites.

The bridging loan application process focuses on:

• The value of the property and your plans for it
• Your existing property equity

Traditional mortgage applications are much more involved:

• Your employment history and income
• Your credit score and financial track record
• Detailed affordability checks

The upshot of this is simple. If you’re self-employed or have a variable income, getting a traditional mortgage is a major headache. Bridging loans don’t care about your income, just your assets and exit strategy.

When To Use Bridging Loans

Bridging loans aren’t suitable for every situation. They are, however, perfect for a variety of specific scenarios.

Here are the situations when bridging loans make the most sense:

• Buying at auction
• Breaking a property chain
• Purchasing a property to renovate

The key factor in all of these cases is that you have a clear exit strategy for how you’ll pay back the loan as soon as possible. This may be by refinancing to a traditional mortgage or selling the property.

When Traditional Mortgages Make Sense

Traditional mortgages are still by far the best option for most residential property purchases.

Pick a traditional mortgage in the following situations:

• Buying your main residence to live in
• Looking for the lowest monthly repayments possible
• Purchasing a property with lots of time to spare

Traditional mortgages offer you stability and affordability over the long term that bridging loans simply can’t match for permanent property ownership.

Costs You Need To Know About

I mentioned before that bridging loans and mortgages aren’t just about the interest rate charged. There are several hidden costs that most people don’t consider when crunching the numbers.

Hidden costs with bridging loans:

• Arrangement fees (1-2% of loan amount)
• Legal fees

Traditional mortgage hidden costs:

• Arrangement fees
• Legal fees
• Survey fees

The difference is the timescale.

You pay bridging loan fees over a few months while mortgage fees are stretched over decades.

Bridging Loans vs Mortgages: Qualification Requirements

The criteria you need to meet in order to be approved for a bridging loan or a mortgage are quite different.

Bridging loan qualification is focused on:

• Property equity (typically needs 25-40% deposit)
• Clear exit strategy for paying the loan back

Traditional mortgage qualification is based around:

• Employment history and steady income
• Good credit score

This is the reason many property investors strongly prefer bridging loans. They are asset-based rather than income-based loans.

Wrapping It Up: Bridging Loans vs Mortgages

When it comes to the question of “is a bridging loan better than a traditional mortgage?” the answer is simple.

It’s not about which is better, it’s about which is better for your specific circumstances and property goals.

Bridging loans are there to help you buy a property when you need speed and flexibility. They’re more expensive in the short term but can save you from losing deals that a mortgage simply couldn’t be arranged for in time.

Traditional mortgages give you long-term stability and affordability, but are too slow and inflexible for non-standard purchases.

The bottom line? Here’s a checklist to choose between bridging loans vs. mortgages:

• Need speed and have a clear exit strategy? Bridging loans are the way to go.
• Want long-term affordability and have plenty of time? Choose a traditional mortgage.
• Buying unusual properties or at auction? Bridging loans to the rescue.
• First-time buyer with a standard purchase? A traditional mortgage makes sense.

Hope this guide has helped clear up the key differences between these two types of property finance.