Holly Bennett
Tim Leonard
Bridging loans aren’t the only way to access short-term funding for property. If you are looking to buy a property or refurbish one so it’s habitable, there may be an alternative to a bridging loan that suits your needs better, or that might cost you less.
Read on to learn about potential bridging loan alternatives and what to consider when comparing them. As bridging loans can also be used for commercial purposes, we’ll explore other options for these too.
What are the alternatives to bridging loans?
If you need to access money in the short term, there may be alternatives to a bridging loan, depending on what you need the funding for and your financial circumstances.
Borrowing more on your mortgage
One option might be to increase the size of your mortgage loan so that you can release equity tied up in your home. This might be through a further advance with your current lender, or by remortgaging with a new lender and borrowing more. Your total mortgage debt will be secured against your home.
The amount you might be able to release depends on a few factors, such as how much of your home you own outright and your credit score. You must be able to afford the repayments, and the lender will want to know what you’re using the money for.
If you are remortgaging, the process will probably take longer than it takes to set up a bridging loan. Even without complications, it can take a month or two. Remember to factor in any fees and charges when you’re calculating the total cost of increasing the size of your mortgage. These might be arrangement, valuation and legal fees, for example. Fees might also include an early repayment charge for ending your current mortgage deal ahead of time, which isn’t generally the case with bridging loans.
Secured loan
This type of loan uses a high-value asset, usually a home, as security for borrowing.
A bridging loan is a type of secured loan, but there are others available, such as second charge mortgages. This is where you have two mortgages secured against one property. If you own your current property outright, then this will be considered a first charge mortgage, with your lender being first in the queue to be paid if you default on the loan.
Make sure you are clear on the potential risks of a secured loan. If you fall behind on payments and default on the loan, the lender could take possession of the property, or whatever else you have used for security – a car, for example – to settle the balance. Also consider that some loans have an early repayment charge if you want to clear the debt ahead of time.
Unsecured loan
Also known as personal loans, unsecured loans require no collateral, so you wouldn’t have to secure your home against one. However, if you are looking to borrow more than £25,000, an unsecured loan may not be an option.
You can borrow personal loans from banks or other lenders. As with secured loans, you will then repay the money you borrow, plus interest and any fees, over a specific timeframe. The longer you take to pay off the loan, the more total interest you will usually pay.
Savings or a family loan
Rather than a loan, there may be other potential options for accessing the cash you need, though it will depend on the amounts you are looking to borrow and what you want to finance.
This could include using money you might have built up in savings accounts. Or you might consider a loan from a family member or a friend, though this can come with complications so it’s sensible to put the loan agreement in writing if you go down this route.
Commercial alternatives to bridging loans
If you’re looking to fund a commercial property purchase, you could consider a number of options to help your investment get off the ground.
Property development finance
This is where you borrow to fund significant building works or development projects, from the ground up. It can include bridging loans, but also business loans and mortgages. Lenders will look at any past property development and will want to see a business plan detailing the works you’re funding.
Refurbishment loans
You may look to this type of loan if you are buying land or property that needs light or heavy renovation before it’s habitable and can be let to tenants. You may be planning to take out a mortgage on the property once the refurbishment is complete, or be renovating it to sell after completion.
Commercial mortgages
A commercial mortgage is a loan that can be secured against commercial property, or even land for commercial development. These are usually longer term loans than business bridging loans, and will also take longer to set up. Interest rates are generally higher than for standard residential mortgages because lenders consider commercial properties to be a greater risk, but can be lower than business loan interest rates.
You will need a deposit, usually of between 20% and 40% of the value of the property. The deposit amount will depend on the type of mortgage you are applying for – for example, whether you’ll be trading from it or letting it out. It is likely that you’ll pay fees for setting up this type of mortgage.
A buy-to-let mortgage may be an option if you’re buying the property as a landlord, rather than through a business, and want to rent it out to tenants.
If you’re looking to secure the finance as soon as possible, for example, if you’re buying a property at auction, a bridging loan will usually offer you a quicker route with shorter terms.
Business finance alternatives to bridging loans
Other, more specific options for businesses funding that might bridge a gap include:
- Asset finance: This type of lending can fund high-value equipment or vehicles or even premises. Lending terms tend to start at a year.
- Invoice finance: This lets you release some or all of the value of unpaid invoices, sometimes within 24 hours. The lender charges a service fee and interest.
- Peer-to-peer lending: This is where a number of investors lend money through an online platform or a broker. The platform matches you with lenders based on what you’re looking to finance and your business.
- Angel investor: This private investor may offer a route to funding, especially if you are a business starting out. The business or individual would invest money with a view to getting a return on that money through the equity they hold in your business.
- Small business loans: These are loans used to raise business finance. These can be short or long term, secured or unsecured. Specific start up loans are also available.
- Business credit lines: This gives your business access to a pool of limited funding it can draw from. You will only pay interest on what’s withdrawn. Rather than fixed monthly payments, you pay it off by an agreed deadline.
What to consider with alternatives to bridging finance
Whatever the type of bridging loan alternative you have in mind, you should read the terms closely and consider and compare:
- the interest rate and the annual percentage rate (APR), which includes fees
- how much you’ll repay in total, over the lifetime of the loan
- any penalties for missed, late or early repayments, or set-up fees at the outset
The options for finance are many, so it can be quite a complicated area. If you’re not sure how to decide on the best funding option for you, it may be worth speaking to a financial adviser. They can explain the details, locate funding you’re more likely to be accepted for and help you find the best rates.
» MORE: How much does a bridging loan cost?
Of course, it might turn out a bridging loan is your best or, perhaps, only option, in which case you must take the time to find the best bridging loan option for you.
» COMPARE: Bridging loans
WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you don’t keep up repayments on a loan or any other debt secured on it.
Image source: Getty Images
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