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Commercial Mortgage Bridge Loans: What You Need to Know

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If you’re interested in commercial bridging mortgage loans, you’ve come to the right place. In this article, we’ll explain how commercial bridging mortgage loans work, what criteria you need to meet, and what the minimum investment is. We’ll also explore why you might want to get a commercial bridge mortgage and whether they are safe.

Key Takeaways

  • Commercial bridging mortgage loans can be a useful tool for investors looking to finance commercial properties.
  • Working with a commercial mortgage broker can help you navigate the eligibility criteria and secure the financing you need.
  • Despite the risks associated with any type of loan, commercial bridge mortgages can be a safe and effective way to achieve your business goals.

Commercial Mortgage Bridging Loan

A commercial mortgage bridging loan is a type of short-term financing solution that is used in combination with a commercial mortgage to purchase a commercial property or plot of land. The bridging loan serves as a means of securing the property quickly, while the commercial mortgage provides longer-term funding. Although they are two separate products, there are scenarios where they need to be offered together.

Use Case For Commercial Bridging Mortgage Loan

Commercial bridging loans are offered on a short-term, interest-only basis. They are usually much quicker to arrange than a commercial mortgage and can be more flexible. Although bridging finance is commonly offered at a higher interest rate, it can help out borrowers in situations where a commercial mortgage cannot, most likely because it would take too long to arrange or a commercial mortgage lender has turned them down for any number of reasons.

To get a commercial bridging loan, the applicant needs to evidence a strong exit strategy (i.e. a means of paying the debt at the end of the term) and this is where a commercial mortgage comes in. The bridging loan can be used to secure a business property or plot of land quickly, and the borrower could later refinance the funds onto a commercial mortgage to serve as the exit strategy.

Term Of Commercial Bridge Loans

Commercial bridge loans are usually a short-term solution, with most commercial lenders expecting them to be settled within 6-12 months. However, some will stretch to 18-24 months and a minority 36 months.

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Reasons To Get Commercial Bridge Mortgage?

If you’re looking to purchase a commercial property or a plot of land, a commercial bridge mortgage could be a financing solution for you. It is a short-term loan that is used to bridge the funding gap between the purchase of a property and the long-term financing solution, such as a commercial mortgage. Here are some scenarios where a commercial bridge mortgage might be useful:

Purposes Of Commercial Bridge Loans

  • Property Auctions: If you’re buying a fixer-upper commercial property under the hammer, a commercial mortgage could take too long to arrange to seal the deal. Taking out a bridging loan first would give you the funds to secure the property, and refinancing onto a commercial mortgage later would give you an exit strategy.
  • Unmortgagable Properties: Some lenders might turn you down for a mortgage on a building that is in disrepair, but bridging finance providers can be more flexible. You could buy the property with a bridging loan, carry out the repairs and then take out a commercial mortgage based on its increased value for the exit.
  • Chain Breaks: A bridging loan could give you the means to keep the deal alive, and the exit strategy could be either the sale of your previous property or refinancing the funds onto a commercial mortgage on the new one.
  • Short-term Credit/Cashflow Problems: Let’s say your current credit/income situation makes you ineligible for a commercial mortgage in the immediate term, but these problems will be rectified within a matter of months. A bridging loan would allow you to close a property transaction quickly, although you will need to prove in advance that you would qualify for a commercial mortgage to serve as the exit.

These are just a few examples of how a commercial bridge mortgage can work in conjunction with a commercial mortgage or as a funding solution on its own. Commercial bridge mortgages offer flexibility and can be tailored to your business finances and funding needs.

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The Eligibility Criteria For Commercial Bridge Mortgage 

To qualify for a commercial bridge mortgage loan, you need to meet the eligibility criteria for both bridging finance and a commercial mortgage. Most lenders offer both products on a case-by-case basis, but it is recommended to seek specialist advice from commercial mortgage brokers who know which lenders are best positioned to offer these products.

Here are some of the eligibility criteria that most lenders prefer:

  • A strong exit strategy for the bridging loan: In the case of a commercial bridge mortgage loan, the exit strategy would usually be to refinance onto a commercial mortgage. Therefore, if you are using separate lenders for the two products, the bridging provider will want to see evidence that the mortgage loan is lined up.
  • Industry experience: Although there are commercial mortgages and bridging loans for first-time investors and start-ups, having a strong track record in the relevant industry should help you convince the lender you can achieve your plans.
  • Clean credit: While there are commercial mortgage lenders and bridging providers who specialise in customers with various types of adverse credit history, having clean credit will usually help convince the lender you’re low risk.
  • A healthy deposit/good security: Bridging loans usually require a deposit of 30%, while commercial mortgages can require anything between 20% and 40% depending on the level of risk. Putting down more than the minimum can lower the level of risk, while deals with a 100% loan to value (LTV) ratio are possible to obtain if you’re in a position to put down extra security, e.g. another property or asset.
  • Profitability: This is essential for the commercial mortgage part. The lender could carry out an assessment of the earnings before interest, tax, depreciation and amortisation (EBITDA) of your business (or the one you’re buying) and may ask to see a business plan with future projections so they know the mortgage is affordable.

If you don’t meet all of the above criteria, don’t panic. Both bridging loans and commercial mortgages are usually assessed on a case-by-case basis, so with the help of a whole-of-market broker, it may be possible to find a specialist lender who will offer you a lifeline even if others have turned you down.

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Minimum Investment Amount for a Commercial Bridge Mortgage?

When it comes to commercial bridge mortgages, most lenders have a minimum loan amount. Some providers set the limit at £50,000, while others won’t lend less than £30,000. For commercial mortgages, the minimum loan amount is typically around £26,000. Anything less than that is usually classified as a business loan. Keep in mind that the loan amount will depend on various factors such as the loan-to-value ratio (LTV), deposit, and additional security.

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What Are Commercial Bridge Mortgages Risks?

The Risks

If you’re considering a commercial bridge mortgage loan, there are several risks you should be aware of. First, there is a risk of repossession if your exit strategy doesn’t pay out within the agreed timeframe. While refinancing a bridge loan is possible in the event of delays, lenders will only do so at their discretion, and many charge hefty fees for this.

It’s also important to note that most commercial bridge loans are not regulated by the Financial Conduct Authority (FCA). This means that it may be more difficult to get compensation if anything goes wrong. Additionally, interest rates on bridging loans can be higher than other financial products, which adds significantly to the overall cost.

To minimize these risks, it’s important to work with reputable lenders and advisors who can assess the level of risk involved in the deal you’re pursuing and suggest ways to mitigate it. While there is always some level of risk involved in any financial transaction, taking the time to understand the risks and work with experienced professionals can help ensure a successful outcome.

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How to Get a Commercial Bridge Mortgage

When pursuing a complex deal like a commercial bridge mortgage, it is best to apply through a whole-of-market broker. This saves you the legwork of approaching multiple bridging and mortgage lenders while also ensuring that you have access to all the best deals you qualify for. Brokers that are whole-of-market can offer bespoke advice on bridging finance and commercial mortgages, as well as introduce you to the lenders best positioned to offer you a favourable deal on these products. 

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Frequently Asked Questions

What are the requirements for obtaining a bridge loan for a commercial property?

To obtain a bridge loan for a commercial property, you typically need to have sufficient equity in the property, a solid exit strategy, and a strong credit score. Lenders will also consider the property’s current market value and your ability to repay the loan.

How do commercial mortgage rates compare to other types of loans?

Commercial mortgage rates tend to be higher than residential mortgage rates due to the increased risk associated with commercial properties. However, rates can vary depending on the lender, the property’s location and condition, and your creditworthiness.

What is the typical duration of a commercial bridge loan?

The typical duration of a commercial bridge loan is between 3 and 24 months. However, the exact duration will depend on the lender, the property, and your individual circumstances.

Can a bridging loan be used for a commercial property purchase?

Yes, a bridging loan can be used to purchase a commercial property. This type of loan is often used to provide short-term financing for commercial property purchases when traditional financing is not available or when a quick closing is necessary.

What are the advantages and disadvantages of using a bridge loan for commercial property investment?

The advantages of using a bridge loan for commercial property investment include quick access to funds, flexibility in terms, and the ability to finance properties that may not qualify for traditional financing. However, the disadvantages include higher interest rates, shorter repayment terms, and the potential for higher fees.

How does a commercial bridge loan differ from a traditional mortgage?

A commercial bridge loan differs from a traditional mortgage in several ways. Bridge loans are typically short-term, have higher interest rates, and are designed to provide quick access to funds. Traditional mortgages, on the other hand, have longer terms, lower interest rates, and are designed for long-term financing.

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