Bridging Loans vs Mortgages: what is the difference?

What are the differences between bridging loans and commercial mortgages?

Bridging loans and commercial mortgages are both forms of property finance that businesses can use for investment purposes. Buying property is a significant investment but the right type of finance makes the process more straightforward and supportive of strategic plans.

Differences between bridging loans and business mortgages

Length of loan term and repayments

Bridging finance is a form of short-term funding that typically lasts for up to 18 months but lending terms can also be as short as one month in some cases. The borrowing business must provide a demonstrable ‘exit plan’ to the lender in terms of how they’ll repay the loan.

A commercial mortgage is a long-term finance that typically spans between 10 and 25 years. The deposit on a business mortgage is commonly higher than a residential mortgage, but the general structure is similar in that the business makes monthly repayments over a set term.

Purpose

Bridging loans are used to bridge the financial ‘gap’ when a property sale has not been completed but the business needs to pursue the purchase of another property. They may also be used to buy commercial property at auction or dilapidated properties.

A commercial mortgage is long-term property finance that also supports business expansion. This might be the development of a property portfolio, for example, the purchase of a property for the business’s own commercial use, or to refinance an existing property.

Interest rates and payments

As bridging finance is taken out over a short term, interest rates are typically higher than those on commercial mortgages. This is because the lender’s risk is greater. Additionally, interest payments can differ in that the terms of some bridging loans don’t require interest to be paid until the loan ends.

Commercial mortgages generally attract lower interest rates due to their long-term nature. In this case, repayments are made monthly and the interest rate can be either fixed or variable depending on the borrower’s needs and preference.

Loan-to-value ratio

The loan-to-value (LTV) ratio, or proportion of the property’s value that’s available to borrow, will be higher on a bridging loan and can even be as much as 100 per cent. In this instance, the lender may need you to provide your home as security and/or other properties that the business owns.

Commercial mortgage providers will generally require a deposit of around 25 per cent or more, making the LTV ratio much lower than a bridging loan. The loan-to-value ratio on commercial mortgages is commonly around 60-75 per cent.

Application process and speed

The purpose of bridging loans demands that they’re sanctioned quickly by a lender and this is achieved by focusing on the value of the security provided rather than extensively checking creditworthiness.

Obtaining a commercial property mortgage is a far longer process that involves professional valuations, checks on business creditworthiness, and reference checks. It may take several weeks or more to process a business mortgage depending on the complexity of the transaction.

Which is better – a bridging loan or a commercial mortgage?

UK Business Finance can help you determine whether a bridging loan or a commercial mortgage is better for you. We’re highly experienced commercial finance brokers and can find the best deals using a whole-of-market approach. Please get in touch to find out more.