When to Choose a Commercial Mortgage or Bridging Loan?
If you were thinking of buying investment property or you might even be a business owner thinking of buying a property to house your business in, two popular options for businesses and investors are commercial mortgages and bridging loans.
While both can provide the funds needed for a number of different property transactions, they serve different purposes and are designed for specific situations. We’ll explore when it’s appropriate to choose a commercial mortgage or a bridging loan, simplifying the decision-making process for those new to the world of property investment.
Long-term property investments
If you’re looking to purchase or refinance a commercial property as a long-term investment, a commercial mortgage is likely the most suitable option. Commercial mortgages are designed for financing properties such as office buildings, retail spaces and industrial facilities. With loan terms ranging from 5 to 25 years or more, they offer stability and a long-term repayment plan, making them ideal for borrowers who intend to hold onto the property for an extended period.
Short-term property transactions
Bridging loans, on the other hand, are a better choice for those seeking short-term financing solutions for property transactions. These loans can “bridge” the gap between the sale of one property and the purchase of another, cover a temporary cash flow issue during property development or renovation and can help you purchase a run down property in need of major refurbishment (which a commercial mortgage lender won’t allow). With loan terms typically between a few weeks and 18 months, bridging loans offer quick access to funds, making them ideal for time-sensitive situations.
Property development or renovation
If you’re planning to undertake a property development or renovation project and require funds for a short period, a bridging loan could be the right option. Since these loans are designed to cover temporary financial needs, they can provide the necessary capital to complete the project and repay the loan once the property is sold or refinanced. One popular way that people do this is via BRRR which stands for Buy, Refurbish, Rent, Refinance.
Auction purchases
When buying a property at auction, you often need to complete the transaction within a short timeframe. Bridging loans can be a suitable solution in this situation, as they provide fast access to funds (after paying your initial holding deposit) and can be repaid once you secure long-term financing (such as a commercial mortgage) or sell the property.
Incomplete credit profile or financial documentation
If you have an incomplete credit profile or lack the necessary financial documentation for a traditional commercial mortgage, a bridging loan might be a suitable alternative. Due to their short-term nature, bridging loans often have more flexible lending criteria, making them a viable option for borrowers who may not qualify for a commercial mortgage.
In summary, understanding the specific purposes and situations for which commercial mortgages and bridging loans are designed can help you make informed decisions about your property financing needs because unfortunately, there are many brokers who will push you down the route of a bridging loan when in many cases you should be getting a commercial mortgage.
While commercial mortgages are ideal for long-term investments and purchasing commercial properties, bridging loans offer short-term solutions for time-sensitive transactions, property development, capital raising, buying land with planning, converting offices into residential apartments, temporary cash flow needs and other situations that a high street bank (who provide commercial mortgages such as NatWest, Santander, HSBC, etc) would not be remotely interested in funding.
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