When it comes to financing the acquisition of a commercial property in the UK, investors and businesses have a range of options at their disposal. Two of the most commonly utilized options are commercial property bridging loans and mortgages. While both of these financing methods can be utilised to purchase a commercial property, there are some noteworthy differences that should be considered prior to making a decision.
Key differences include:
Loan term: Bridging loans are short-term loans that are typically repaid within a year, while mortgages are long-term loans that can be repaid over a period of up to 25 years.
Interest rate: Bridging loans are generally offered at a higher interest rate than mortgages.
Security: Both bridging loans and mortgages are typically secured against the property being purchased. However, the type of security required may differ. For example, a mortgage may require a first charge on the property, while a bridging loan may only require a second or third charge or may require a first charge on other properties in addition to the property or land being purchased.
Deposit: Mortgages typically require a deposit of at least 5-10% of the property's purchase price, while bridging loans may require smaller or larger deposits, and by implication larger or smaller loan to values (LTVs) depending on where the transaction is in the economic cycle.
Repayment structure: Mortgages are typically repaid through monthly instalments that include both principal and interest, while bridging loans may have a balloon payment at the end of the loan term, where the borrower is required to repay the remaining balance in a single payment.
Transaction costs: Both bridging loans and mortgages may involve transaction costs such as origination fees, appraisal fees, and legal fees. However, these costs may be higher for bridging loans due to the shorter loan term and higher interest rate. For instance, exit costs and broker fees can arise in bridging loans from time to time.
Prepayment penalties: Some mortgages may have prepayment penalties, which means that the borrower is charged a fee for paying off the loan early. Bridging loans generally do not have prepayment penalties.
Underwriting: The underwriting process, which is used by lenders to assess the risk of a loan, may differ for bridging loans and mortgages. Bridging loan lenders may place more emphasis on the asset being purchased and the borrower's exit strategy, while mortgage lenders may focus more on the borrower's creditworthiness and financial history.
Eligibility: In order to qualify for a mortgage, borrowers generally need to have a good credit score, a stable income, and a low debt-to-income ratio. In contrast, bridging loans are more flexible in terms of eligibility and may be available to individuals or businesses with less than perfect credit.
Purpose of the property: Some lenders may have restrictions on the type of property that can be purchased with a mortgage. For example, a lender may only offer a mortgage for a property that will be used for residential, owner-occupied, dwelling purposes. Bridging loans, on the other hand, may be available for a wider range of property types, including commercial and mixed-use properties, such as a purpose built office building or retail space.
Borrowing limits: The amount that can be borrowed with a commercial property bridging loan may be higher or lower than the amount that can be borrowed with a mortgage. This can depend on the lender and the terms of the loan.
Speed of approval: Bridging loans can typically be approved and funded much faster than mortgages. This is because the underwriting process for bridging loans is usually simpler and more streamlined than the process for mortgages. If you need to purchase a property quickly and do not have the time to wait for a mortgage to be approved, a bridging loan may be a good option.
Valuation: A lender will typically require a valuation of the property being purchased as part of the loan application process. The valuation process may differ for bridging loans and mortgages. For example, a mortgage lender may require a full property survey, while a bridging loan lender may rely on a desktop valuation.
Fees: Both bridging loans and mortgages may have fees associated with them, such as application fees, arrangement fees, and early repayment fees. These fees may vary depending on the lender and the terms of the loan.
Considerations
When considering a commercial property bridging loan or mortgage, it is important to weigh the pros and cons and availability of each option. Bridging loans offer the advantage of expeditious access to funds, but they come with higher interest rates and the need to secure the loan against the property being purchased. Mortgages offer lower interest rates and the ability to amortise loan repayment over a longer period of time, but the approval process can be lengthy. It is also worth noting that the amount that can be borrowed with a bridging loan may be higher or lower than the amount that can be borrowed with a mortgage, depending on the lender, the terms of the loan and the transaction’s point in the economic cycle.
It is important to carefully consider all of the differences between commercial property bridging loans and mortgages when deciding which financing option is right for you. It may also be helpful to consult with a financial professional or seek advice from multiple lenders to ensure that you make the most informed decision.
Further information
To enquire, please contact sr@bridgingfunding.com.
About the author
Sabbir Rahman is Managing Director of Langdon Capital and a Partner at Bridging Funding. He has held prior roles with Morgan Stanley, Lazard and Deutsche Bank. He has executed over £60 billion of debt and equity financings, debt refinancings, debt restructures, mergers, acquisitions, carve-outs, divestments, PE-exits, JVs, minority interest investments and derivatives transactions with private equity funds, financial sponsor groups and global corporates over his career.
About Langdon Capital
Langdon Capital provides in-house transaction services to C-suites and Boards of publicly-listed and PE-backed businesses during the negotiation, execution and due diligence of corporate finance and capital markets transactions and senior interim leadership resourcing across finance, treasury, strategy and corporate development | contact info@langdoncap.com | visit www.langdoncap.com
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