Bridging Finance vs Property Investment Mortgages
What are Property Investment Mortgages:
By Daryl Norkett, Director of Real Estate Proposition
These are long-term loans typically used to buy or refinance properties that produce cash flows to service interest, and sometimes capital payments on a monthly basis.
Mortgages are ideal for stable, income-generating properties such as residential rentals or commercial spaces.
Pros:
- Lower interest rates: Mortgages generally offer lower interest rates compared to bridging finance (see bridging below). This can reduce the overall cost of financing.
- Repayments: With a mortgage, interest is paid monthly for the loan term. Whereas with bridging finance it is common for interest to be included with the loan amount to be repaid at the end of the term, which reduces the amount of cash available on the day that the loan completes.
- Long-term stability: Mortgages provide long-term financing, which is ideal for investors looking to hold onto a property for an extended period. This stability can help with long-term planning and, for capital repayment mortgages, could even provide a path to owning the property free of lending.
- Budgeting: Often mortgages can be secured on fixed interest rates for periods of 2, 3, 5 or even 10 years. Having certainty of monthly repayments can help to plan cash flows.
Cons:
- More time to arrange: A mortgage is a long-term commitment for both the lender and the borrower. Thorough underwriting is required and this can take some time. Underwriting often includes credit checks and a holistic verification of your personal and business finances.
- Limited flexibility: Mortgages may come with restrictions, such as prepayment penalties or limitations on property use, which can limit your investment strategies.
- Slower access to funding: The time it takes to secure a mortgage may cause you to miss out on time-sensitive investment opportunities.
What is Bridging Finance:
Bridging finance, also known as bridging loans or short-term loans, is designed for quick access to capital, often for time-sensitive investments or purchases of distressed properties.
These loans usually come with higher interest rates and shorter terms compared to mortgages.
Bridging finance is ideal for refurbishing or converting assets, flipping properties, purchasing properties at auctions, or bridging the gap between buying a new property and selling an existing one.
Pros:
- Speed: Bridge finance can be secured more quickly than mortgages, making them suitable for seizing opportunities that require immediate funding. This is achieved by underwriting, valuing and working through the legal process at the same time rather than one after the other as is common in the mortgage market.
- Flexible terms: Bridge finance often has more flexible terms and fewer restrictions, allowing investors to tailor the financing to their specific needs.
- Property renovation: Bridging finance can cover both the purchase price and renovation costs, making it suitable for fix-and-flip strategies.
Cons:
- Higher interest rates: Bridge finance typically comes with higher interest rates than mortgages, which can increase the cost of borrowing.
- Shorter terms: The short-term nature of bridge finance means they must be repaid quickly, which can put pressure on investors to sell or refinance.
- Risks: Bridge finance are associated with higher risks, as they may require a property to be sold quickly to repay the loan. If the property doesn't sell as expected, it can create pressure. It’s important to always have multiple exit strategies to mitigate these risks.
In conclusion, the choice between a mortgage and bridging finance depends on your specific investment goals, property type, and timeline. Mortgages offer stability and lower rates for long-term investments, while bridge finance provides speed and flexibility for time-sensitive transactions or where a refurbishment is planned. As a property investor, understanding the context and weighing the pros and cons of each option is crucial in making the right financing decisions for your unique investment portfolio.