Commercial bridging loans

Bridging finance differs slightly from a commercial mortgage in two key ways:

• Shorter term
• Bridging loans are meant only to ‘bridge’ the gap between you selling a property, or securing longer term finance once a project is completed. Therefore, they will typically only allow a maximum duration of 6-12 months before the money has to be repaid.
• Quicker application process

Bridging loans can have a far quicker application process than commercial mortgages – allowing you to take advantage of a property bargain.

Despite these key differences you should be aware that a bridging loan is still a mortgage in that it is secured on the property you are purchasing. That means that if you fail to keep up repayments on a bridging loan – the property could be repossessed. 

Note: The repossession process for a bridging loan can be much swifter than repossession on a regular commercial mortgage.

You should also note that bridging finance costs roughly the same amount to arrange as a commercial mortgage – and the finance you are receiving is going to be for a far shorter term. So only consider bridging if you will be unable to secure a commercial mortgage, or you expect to only need finance for a relatively short initial term (while you renovate a property to sell for instance).

A bridging lender does not look at long term affordability in making their lending decision, simply focusing on whether the security for their money, the property, is worth at least what they are lending, if they had to re-possess it and sell it quickly at auction. The bridging lender will base their value of the property on the 90 day forced sale value, which they will ask the valuer to provide. This may be up to 20% lower than the Open Market Value, which a mortgage lender will use.

Because some property takes longer to sell (commercial property for example) than a house in a high demand area might, this affects how much a bridging lender will lend against it, so whereas 75% LTV is typically available on a house, only 65% LTV might be available on a shop.

Bridging is short-term finance, and the interest rate will be cheaper if you have it for a shorter time. So 3 months is a cheaper rate than 6 months. Bridging finance can be obtained for terms up to 24 months.

Be careful though in under-estimating how long you require the funds for. Normally the borrower who is not flipping the property will be refinancing the bridge loan with a term mortgage, but term lenders can be unpredictable as to time to completion. Some bridge lenders charge high penalties if you exceed the agreed term. You must look at small print very carefully, as the cheapest rate may not be the cheapest overall deal, when all the various fees are added.

Despite these key differences you should be aware that a bridging loan is still a mortgage in that it is secured on the property you are purchasing. That means that if you fail to keep up repayments on a bridging loan – the property could be repossessed.

The repossession process for a bridging loan can be much swifter than repossession on a regular commercial mortgage.

You should also note that bridging finance costs roughly the same amount to arrange as a commercial mortgage – and the finance you are receiving is going to be for a far shorter term. So only consider bridging if you will be unable to secure a commercial mortgage, or you expect to only need finance for a relatively short initial term (while you renovate a property to sell for instance).

The bridging lender will look to see what your exit route will be before agreeing a loan, so you must be clear whether you will be refinancing to a term mortgage or selling the property.

Affordability will not be a consideration because most lenders charge the interest up front (called rolled-up interest). The interest and fees will be deducted from the loan. If your gross loan for say 12 months is £200,000, then your net loan after fees and interest may be £184,000. That is what you take away. If you use the money for only 6 months then the lender will refund 6 months of the interest charged on redemption.

If you are looking to secure a bridge on your own home that is Regulated by the FCA, and only a few lenders offer such loans. There are at least 300 unregulated bridging lenders at present in the UK market, offering loans secured on investment property.

Most bridging lenders will accept business from borrowers directly, but you should rely on an experienced broker to advise you unless you are very familiar in dealing with them. There are many technical issues to grasp and pitfalls for the unwary can be very expensive.