Alternatives to Bridging Loans

Bridging loans are a good way to access short-term funding for a property. But they aren’t always the best solution depending on your circumstances.

If you need funds for buying property, renovations or cash flow, tailored solutions like personal loans, second-charge mortgages, and commercial mortgages provide lower interest rates and longer repayment terms than a typical bridging loan.

This article looks at these alternatives, helping you make an informed decision about whether they’re a good option instead of a bridging loan.

What is a bridging loan?

A bridging loan is a short-term loan that bridges a gap between a debt coming due and the main line of credit becoming available. They’re typically used in real estate transactions, and help buyers complete the purchase of a property before selling their existing home.

Bridging loans are usually quick to arrange but come with costs and higher interest rates than traditional mortgages. They are ideal for borrowers who need immediate cash flow and intend to repay the loan in a short period once they secure long-term financing or proceed from a property sale.

When would a bridging loan be appropriate?

There are lots of times when a bridging loan would be appropriate. They’re useful if you want to promptly purchase a property, provide finance for refurbishments, prevent repossession or purchase property at an auction.

Another useful situation where a bridging loan is appropriate is in a chain break, where a buyer’s ability to purchase a new home depends on selling their existing property. A bridging loan can fill the financial gap if the sale of the existing property is delayed.

If you want to get an idea of what you might repay if you take out a bridging loan, use our calculator below. This will give you a clearer view of whether a bridging loan or an alternative is the right option for you.

Alternatives to bridging loans

If a bridging loan doesn’t suit your situation, plenty of alternatives are available to you that are more flexible or cost-effective solutions for short-term financing needs. These options include remortgaging, personal loans, and secured loans among others listed below.

Remortgaging

Remortgaging involves moving your current mortgage to a new lender or renegotiating the terms with your current lender. The advantage of remortgaging is that you can access more funds than you would with a bridging loan, which is useful if you’re refurbishing your home, or consolidating high-interest debts.

Unlike bridging loans, which are short-term and come with higher interest rates, remortgaging offers the advantage of lower monthly payments spread over a longer period. This makes it a financially prudent option for those who do not require immediate liquidity but are looking for a stable and long-term reduction in their borrowing costs.

It’s important to consider any potential fees associated with remortgaging, such as early repayment charges and arrangement fees, to ensure it is a good alternative for your financial situation.

Personal loans

A personal loan is a good alternative to a bridging loan as they don’t require collateral like a home or other property. They’re available to a wider range of borrowers and are flexible, but they are typically only available for amounts up to £25,000.

Personal loans often come with fixed interest rates and predictable monthly payments, which makes your budget easier to manage. The application process is usually straightforward, with funds potentially available within days, making it suitable for urgent financial needs.

Remember, interest rates for personal loans can vary significantly based on credit history. For borrowers with good credit, personal loans can offer lower rates than bridging loans, making them a more cost-effective solution.

Secured loans

A secured loan differs from a personal loan as it’s backed by collateral such as your house, car or another property. This means you’ll get more favourable interest rates and a longer repayment period than with a bridging loan.

They’re suitable for larger amounts and useful for extensive projects like home renovations, large purchases, or consolidating substantial debts. The longer repayment period offers flexibility you won’t get with a bridging loan, reducing your financial burden.

This makes secured loans a more budget-friendly and less risky solution for long-term financing needs. However, borrowers should be mindful of the risks, as failing to meet repayment obligations can lead to the loss of the secured asset.

Equity release

An equity release allows you to release a portion of the value of your property without needing to pay anything back each month. Instead, the loan is paid back when the property is sold, move into long-term care or pass away.

It allows homeowners to either take a lump sum or receive regular payments while still living in their home, through options like lifetime mortgages — where no repayments are made until the home is sold or the owner passes away — or home reversion plans, where part of the home is sold in exchange for funds and a rent-free residence.

Equity release is useful for those without a short-term repayment strategy, as it eliminates monthly repayments and eases financial strain. But it reduces the value of your estate and could impact eligibility for means-tested benefits

Commercial mortgages

A commercial mortgage is a long-term loan used to buy or refinance a plot of land or a property for commercial use. It’s suitable for buying office buildings, pubs, hotels, retail spaces, or other commercial properties, and can also be used for expanding existing facilities or refinancing existing debts.

Commercial mortgages often have longer repayment periods offering more stability than a short-term bridging loan. Your monthly repayments will be predictable and you’ll have access to lower interest rates too. The mortgage is secured against the property that’s being financed.

The application process involves a thorough assessment of business finances and future revenue projections, as the loan terms and interest rates are often influenced by the business’s creditworthiness and the property’s potential to generate income.

Development Finance

Development finance offers targeted funding for property developers and investors who want to undertake big commercial projects or renovations on a residential property. It provides a larger capital base suitable for covering both the purchase of property and the associated development costs.

Unlike bridging loans, which are mostly designed for property purchases and use an existing property as collateral, development finance is secured against the projected value of the property being developed.

Opting for development finance requires detailed project plans and budgets, as lenders must assess the feasibility and potential return on investment. The application process can be complex, involving scrutiny of the development’s scale and the borrower’s track record.

Second-charge mortgage

A second-charge mortgage uses the equity in your property as collateral for a second mortgage. The second-charge mortgage ranks behind your primary (or first charge) mortgage in terms of repayment priority in case of default.

As an alternative to bridging loans, second-charge mortgages typically provide lower interest rates and longer repayment terms. This makes them a cost-effective solution if you’re looking at home renovations or consolidating large debts.

They’re useful for borrowers who need additional funding but do not want to refinance their existing mortgage or disturb an advantageous interest rate on their first mortgage. However, borrowers must manage their repayments carefully, as defaulting on a second-charge mortgage can still lead to repossession of their home.

Loan from family or friends

Borrowing money from family or friends is a good alternative to a bridging loan but it’s not without challenges.

While the money may be easier to access, this can introduce complexities into your relationship, especially if you struggle to repay it. You can dip into your savings instead, but you should consider your financial situation before doing so.

The more savings you have to draw from, the better position you’re in to use them as an alternative to a bridging loan. Especially as you won’t have to pay interest or fees from using a broker.

Refurbishment loans

Refurbishment loans are designed for property improvements and offer tailored financing to cover the costs of upgrading or renovating a property. They’re a good alternative for property developers or homeowners who want to increase a property’s market value through refurbishment before sale or rental.

These loans typically provide enough funding to cover both the purchase and the refurbishment costs, with the loan amount based on the projected value of the property after improvements, which can enhance loan-to-value terms.

Refurbishment loans may offer more flexible repayment terms and potentially lower interest rates, making them a more economically viable option for long-term investments in a property’s value.

What to consider when looking for an alternative

With plenty of options available to you instead of a riding loan, there are a few things you need to consider before you make a decision. We’ve listed some of these below:

• Loan Purpose: Determine the specific reason you need the loan. Different financing options are better suited to different purposes (e.g., long-term investment, property development, quick cash flow needs).
• Loan Term: Consider how long you will need the funds. Some alternatives, like commercial mortgages or second-charge mortgages, are suited for longer-term financing, while others, like personal loans, might be better for shorter terms.
• Interest Rates: Evaluate the interest rates offered by different loan options. Bridging loans tend to have higher rates compared to other types of loans such as personal loans or home equity lines of credit.
• Repayment Flexibility: Look for a loan that matches your ability to repay. Some loans, like equity release, do not require monthly payments, whereas others, like personal or secured loans, have fixed monthly payments.
• Fees and Charges: Check for any additional fees or charges that may apply, including arrangement fees, early repayment penalties, and legal fees.
• Loan Amount: Ensure the alternative you consider offers the amount of money you need. Loan amounts can vary widely depending on the type of loan and the lender.
• Collateral Requirements: Understand what collateral, if any, is required. Secured loans and second-charge mortgages will require collateral, typically in the form of property, whereas personal loans might be unsecured.
• Approval Time: Consider how quickly you need the funds. Some options, like personal loans, can be approved quickly, whereas others, like commercial mortgages, may require a longer processing time.
• Credit Requirements: Check the credit requirements for each alternative. Some options, like personal loans, might have stricter credit requirements than others, like second-charge mortgages or development finance.
• Financial Impact: Assess the long-term financial impact of taking out the loan, including how it affects your credit score, financial stability, and overall debt levels.
• Exit Strategy: Particularly for larger or more complex loans, it’s important to have a clear exit strategy in place. This ensures you can clear the debt without financial strain or losing any collateral.

How a mortgage broker can help

If you’re unsure what alternative to a bridging loan is best for you, using the services of a mortgage broker is a good idea. They can guide you through the pros and cons of bridging finance and whether using an alternative is in your interests based on your circumstances.

We can find the right broker for you, free of charge. Our broker-matching service will assess your needs and circumstances to pair you up with the bridging finance expert who’s best placed to assist you. This will be someone we’ve handpicked because of their track record helping customers with similar goals to you.

Call 0808 189 2301  and we’ll set up a free, no-obligation chat between you and speak to one of our OMA®Verified experts who is an expert in this area today.