Bridging loans are a popular short-term financing option in the UK property market.
These loans come with higher interest rates and shorter repayment terms than traditional mortgages.
As such, many borrowers wonder if they can transition from a bridging loan to a more affordable, long-term mortgage. The good news is that yes, in many cases, you can pay off a bridging loan with a mortgage.
This strategy, often called ‘refinancing’ or ‘exiting’ the bridge, can offer significant benefits to borrowers. Let’s explore how this process works and what you need to know.
What is a Bridging Loan?
Bridging loans are short-term financing solutions designed to help borrowers quickly secure funds for property transactions.
These loans typically last from a few months up to two years and are secured against property or land. They’re often used to buy property at auction, fund renovations, or prevent property chain breakdowns.
The key feature of bridging loans is their speed and flexibility, allowing borrowers to access funds quickly when traditional financing isn’t suitable or available.
How Do Mortgages Differ from Bridging Loans?
While bridging loans serve a specific short-term purpose, mortgages offer a different set of advantages for property financing.
Mortgages are long-term loans specifically designed for property purchases. They have terms ranging from 5 to 35 years and offer lower interest rates compared to bridging loans.
Mortgages require regular monthly repayments of both principal and interest, whereas bridging loans allow interest to be ‘rolled up’ and paid at the end of the term along with the principal.
The main differences lie in their purpose, term length, and cost.
Bridging loans are meant for short-term needs and quick access to funds, while mortgages are for long-term property financing.
One important difference is that the bridging lender will want to know up front how you will pay them back. This is known as your exit strategy. It needs to be well thought out and plausible. Repayment via a long-term mortgage is an acceptable exit plan.
The Process of Paying Off a Bridging Loan with a Mortgage
Refinancing a bridging loan with a mortgage is a multi-step process. It begins with a thorough assessment of your current financial situation, including the terms of your bridging loan and the current value of your property.
Once you have a clear picture of your situation, the next step is to explore the remortgage market.
The type of mortgage you’ll need – whether residential or buy-to-let – will depend on your plans for the property.
The application process comes next. When submitting your mortgage application, be prepared to explain that the purpose is to refinance your bridging loan. Lenders will want to understand your exit strategy from the bridging loan and assess your ability to meet the new mortgage payments.
An important stage is the property valuation, which the mortgage lender will arrange. This step is particularly important if you’ve made improvements to the property since taking out the bridging loan, as it could affect the loan-to-value ratio and the terms of your new mortgage.
Finally, once your application is approved, the legal process of transferring from the bridging loan to the mortgage begins. Your solicitor will handle the details of paying off the bridging loan with the new mortgage funds. Upon completion, you’ll bid farewell to your bridging loan and begin making regular payments on your new mortgage.
Who Can Use This Strategy?
Eligibility for refinancing a bridging loan with a mortgage depends on various factors.
The type of property plays a role – standard residential properties are often easier to refinance than commercial or specialised properties. Lenders will assess your income, credit history, and the current loan-to-value ratio of the property.
Most lenders prefer that any renovations or development work be completed before refinancing.
They’ll also want to see that the property is in a mortgageable condition and that you have a stable income to support mortgage repayments.
When to Consider This Option
If you’ve completed a property renovation project funded by a bridging loan, and the property is now habitable or rentable, it’s an ideal time to transition to a mortgage. Similarly, if your personal circumstances have improved – such as securing a higher-paying job – you might find it easier to qualify for a favourable mortgage.
Market conditions can also influence this decision. If interest rates have dropped since you took out your bridging loan, refinancing could result in significant savings.
How a Broker Can Help
Transitioning from a bridging loan to a mortgage can be a bit daunting.
This is where a mortgage broker’s expertise becomes invaluable. A broker can access a wide range of mortgage products, including those from specialist lenders who may be more amenable to refinancing bridging loans.
Mortgage brokers understand the intricacies of both bridging finance and mortgages, allowing them to guide you through the process efficiently. They can help you prepare a strong application, explaining your situation to lenders and potentially negotiating better terms on your behalf.
If you’re considering this option, it’s advisable to seek professional advice.
At Drake Mortgages, we specialise in helping clients with complex financing situations, including bridging loan exits.
Our team of expert brokers can assess your individual circumstances, help you explore your options, and guide you through the refinancing process.
Contact us today to discuss how we can help you transition from your bridging loan to a suitable mortgage product.