Bridging loan vs commercial mortgage

We look at how bridging loans compare to commercial mortgages and the benefits and downsides of each to help you decide which one would suit you best.

When you’re buying or refinancing commercial property you have two main options – a bridging loan or a commercial mortgage. Both are loans secured on property but which one is best for you depends on your circumstances and the property you want to buy. Here are the differences to be aware of to help you choose.

The key differences between bridging loans and commercial mortgages

Bridging loans differ from commercial mortgages in a number of ways:

Shorter terms – bridging loans are designed to be taken out over a shorter period than commercial mortgages. Bridging loan terms tend to be between one month and three years with 12-18 months most common. Commercial mortgages can be taken out for up to 25 or 30 years.

Higher cost – as bridging loans are short-term loans with more flexible lending criteria they are considered to be higher risk than commercial mortgages so interest rates are higher. Both products are bespoke to the borrower, however, with the interest rate you’ll pay based on the lender’s assessment of how risky you are to lend to.

Faster speed – bridging loans are much quicker to arrange than commercial mortgages because there are fewer lending criteria and less paperwork. You can often get a bridging loan within days while the application process for a commercial mortgage can take up to two months or more.

No monthly payments – bridging loans are interest-only loans and although you can choose to make an interest payment each month, you usually pay it all off at the end of the term along with capital. Another option is ‘retained interest’ where the total interest is deducted from the loan before you get the money.

Can be commercial or residential – bridging loans can be secured on residential as well as commercial property. Any bridging loan where at least 40% of the property it’s secured on will be used as your home is regulated by the Financial Conduct Authority so certain rules must be followed to make sure the loan is right for you.

More flexible lending criteria – you can take out a bridging loan on almost any property, including one in a poor condition or land without planning permission, as long it provides adequate security for the loan and you have a viable exit strategy in place (how you plan to pay off the loan) – you intend to sell the property when it’s been renovated to repay it for example. The lender also won’t pay as much attention to your personal finances as when you apply for a commercial mortgage.

No early repayment charges – bridging loans are less likely to have early repayment charges if you pay off the loan before the end of the agreed term than commercial mortgages, which might charge them during the initial deal period.

Bad credit is less of an issue – if you’ve had credit problems in the past – you’ve missed loan repayments or had county court judgements against you for example – they are less likely to affect your ability to get a bridging loan than a commercial mortgage. This is because the lender will focus mainly on your exit strategy to reassure itself that it will get its money back. You may still be offered a less favourable interest rate though.

The benefits of bridging loans and commercial mortgages

Bridging loans have the following benefits:

  • They are quick to arrange so are useful if you need money fast – to buy a property at auction or make sure you don’t lose the perfect property for example.
  • You don’t have to make monthly payments each month. This means you can free up cash for other things, such as refurbishing the building, and only pay the interest when you have the money to do it.
  • The lender doesn’t scrutinise your personal finances in as much detail as with a commercial mortgage – it focuses more on the property and your exit strategy when deciding whether to lend to you – so a bridging loan can still be an option if you can’t get a commercial mortgage.
  • Lenders accept a much wider range of properties as security, even dilapidated ones.
  • You can pay the loan off early without having to pay early repayment charges.

On the other hand, they are a relatively expensive way to borrow and you can only take them out for a short period – usually up to three years.

Commercial mortgages have the following benefits:

  • You can borrow money over a long period to spread the cost of the loan, although it’s likely you’ll end up paying more interest overall than with a short-term bridging loan.
  • They are a relatively cheap way to borrow compared to bridging loans.

However, the application process for commercial mortgages can be lengthy, you’ll need to provide more paperwork than with a bridging loan and you need to make monthly repayments to the lender.

You may also not be able to get a commercial mortgage on certain types of property, such as ones in a poor condition, or if you have had credit problems in the past and you may have to pay early repayment charges if you decide to pay the mortgage back early.

How to get the best bridging loan or commercial mortgage

Whichever type of finance you decide is right for you, you should speak to a specialist broker to find the best deal for your circumstances as they will be able to look at the whole available market. They will also have access to deals that are not available directly from lenders and know which lenders are most likely to lend to you.

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Bottom line

Although bridging loans are a more expensive way to borrow than commercial mortgages, they can be a good option if you can’t get a mortgage or you need to raise money fast. Once you have made up your mind, you can compare bridging loan rates here and commercial mortgage rates here.

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