Commercial Mortgages vs. Bridging Loans: Key Differences Explained

If you’re looking to finance a commercial property or need short-term funding for a property transaction, you might be wondering whether a commercial mortgage or a bridging loan is the right choice for you. We explain the key differences between the two types of loans, making it easy for those with no prior knowledge of the subject to understand the basics and make an informed decision.

In the world of property financing, there are two popular options available to businesses and investors: commercial mortgages and bridging loans. While both can help you secure the loan you need, they serve different purposes and come with distinct features. Understanding the key differences between these financing options will enable you to choose the one that best suits your specific needs.

Purpose of the Loan

The primary difference between a commercial mortgage and a bridging loan lies in their intended use. Commercial mortgages are long-term loans designed for purchasing or refinancing commercial properties, such as office buildings, retail spaces or industrial facilities.

In contrast, bridging loans are short-term financing solutions, traditionally used to “bridge” the gap between the sale of one property and the purchase of another but more recently their use has evolved and they are now used to purchase auction properties, dilapidated properties that need refurbishment, or any other property where the transaction has to be completed quickly. They can also be used to cover short-term cash flow issues and they can even be used to buy land with or without planning. 

Loan Duration

Quite often, a bridging loan will be used to purchase a property for a short period of time, say up to 12 or 18 months and then the borrower well then move onto a long-term commercial mortgage which can be taken over 15, 20 or 25 years. The reason the borrower will need to move their bridging loan over to a commercial mortgage is simply because a commercial mortgage is far cheaper than a short-term lending option such as a bridging loan.

Interest Rates

Commercial mortgages tend to have lower interest rates compared to bridging loans, as they are seen as less risky by lenders. Commercial mortgages also treated differently in how they are repaid. For example, a bridging loan can be taken over a period of time without any of the interest being paid until the very end of the loan term when the property is either sold or refinanced onto a long-term commercial mortgage.

A commercial mortgage on the other hand will have to be paid monthly, either just the interest or both the interest and the capital. This means that any borrower taking a long-term commercial mortgage will have to prove that they have sufficient cash flow/income to ensure they can pay the mortgage every month. The interest rates for commercial mortgages are usually fixed or variable, depending on the lender and borrower’s preference.

On the other hand, bridging loans often come with higher interest rates due to their short-term nature and the increased risk associated with them. 

Loan-to-Value (LTV) Ratio

Commercial mortgages typically offer a lower LTV ratio, which means the borrower can borrow a smaller percentage of the property’s value, usually around 60% to 75%. Bridging loans, however, often provide a higher LTV ratio, sometimes up to 80% or even 100% in some cases.

However it is worth noting that whenever a lender or a mortgage broker tells you that they can provide you with 100% funding via bridging loan, this will mean that the lender will usually have to take security of your main home all of the property that you were in addition to the property that you are getting the bridging loan on.

This can make bridging loans more appealing to borrowers who need a higher percentage of financing for their property transaction.

Application and Approval Process

The application and approval process for commercial mortgages can be more complex and time-consuming due to the need for extensive documentation, credit checks, income verification, references and in-depth valuation report. Typical processing time for a commercial mortgage will be between four and eight months and we have seen instances where a commercial mortgage has taken 12 months to complete from start to finish so please bear in mind, a commercial mortgage is not a quick process.

Bridging loans, in comparison, have a faster and more streamlined application process and in most cases the bridging lender will not ask for any verification of income, bank statements or other detailed documentation.

A bridging loan is primarily based on the security question i.e. the property you’re looking to secure a loan on.

In summary, understanding the key differences between commercial mortgages and bridging loans is essential for anyone considering property financing. While commercial mortgages are well-suited for long-term investments and purchasing commercial properties, bridging loans offer short-term solutions and will help in situations where a High Street bank or lender will not offer you a commercial mortgage such as purchasing land, or converting an office block into residential apartments.

Make sure you assess all of your options and make sure that you get a full breakdown of the fees and other charges you will be paying, regardless of whether that is a commercial mortgage or a bridging loan because once you are committed, you have a responsibility to repay the loan within the time period stated by the lender and if you don’t, it could affect your credit history.