Home Insights & Advice What is a commercial mortgage bridging loan

What is a commercial mortgage bridging loan

by John Saunders
27th Jul 21 6:02 pm

Commercial mortgage bridging loan’ is a term primarily used to describe when a business mortgage and bridging loan are used in conjunction with each other to facilitate the purchase of a commercial property or plot of land.

While they are basically 2 separate products, there are situations where they need to be offered together, with a bridging loan providing short-term finance for completing an initial purchase and a mortgage providing the longer-term funding.

How do commercial bridging mortgage loans work

Bridging loans are offered on a short-term, interest-only basis. This type of loan is much quicker to arrange compared to a mortgage and is usually more flexible.

While bridging loans are usually offered at a higher rate of interest, they can help out borrowers in instances where mortgages can’t, most likely due to the fact it would probably take too long to arrange or they have been turned down by mortgage lender for any number of reasons.

To get a bridging loan, applicants have to provide evidence of a strong exit strategy (i.e. means of paying debt at the end of the term), which is where commercial mortgages come in.

When it comes to commercial mortgage bridge loan investments, bridging loans can be used for quickly securing a business property or plot of land and the borrower could refinance the funds later onto a commercial mortgage to serve as the exit strategy. There are many sorts – check out the second charge bridging loan for example, different to the traditional sort.

How long are commercial bridge loans

Commercial bridge loans are usually a short-term solution, with the vast majority of lenders expecting them to be settled within 6 to 12 months. However, some can stretch 18 to 24 months with a minority stretching 36 months.

Why get a commercial bridge mortgage

A number of scenarios can see you taking out a bridging loan before getting a commercial mortgage, and they are mostly situations where timing is critical or where a business mortgage lender would likely turn you down in the immediate term.

What are commercial bridge loans used for

If you buy a fixer-upper commercial property at auction, a business mortgage may take far too long to arrange and close. Taking out a bridge loan first, however, will provide you with the funds needed for securing the property and later refinancing onto a commercial mortgage and would provide you with an exit strategy.

Non-mortgageable properties

Let’s assume that you have the expertise and capital needed to transform a shell of a building into commercial premises. While some lenders may turn you down for a mortgage on a property that’s in disrepair, bridging finance providers tend to be more flexible. You can use the bridging loan to purchase the property, undertake the repairs, and then take out a commercial mortgage based on the increased value for your exit.

Chain breaks

Commercial property owners sometimes find themselves facing a situation where it is necessary to sell a property before purchasing a new one. Both deals are in motion, but the sale of the existing premises falls through thus stopping the purchase in its tracks.

A bridging loan could provide the means to keep the deal alive while the exit strategy could be either the sale of your previous property or refinancing funds onto a commercial mortgage on the new one.

 You have short-term cashflow/credit problems

Let’s assume that your current income/credit situation means that you are ineligible for a commercial mortgage in the immediate term, but those issues will be rectified within several months.

A bridging loan would let you quickly close a property transaction, but you would need to prove beforehand that you qualify for a commercial mortgage to serve as the exit.

The above scenarios are just some of the few where a bridging loan and a commercial mortgage can work in conjunction with each other.

Eligibility criteria for a commercial bridge mortgage

Lenders may be willing to offer both the ‘bridge’ and ‘mortgage’ aspects of a commercial bridge mortgage loan, but using separate providers isn’t unheard of. To qualify, however, you will be required to meet the eligibility criteria for commercial mortgage and bridging finance. That’s why it is advisable to first seek specialist advice. The commercial mortgage brokers that you should work with should know the exact lenders that are in the best position to offer such products.

Both of the products are typically offered on a case-by-case basis, but the vast majority of lenders prefer customers to have the following:

A Strong Bridging Loan Exit Strategy: The exit strategy if you are looking to get a commercial bridging mortgage loan is usually to refinance onto a commercial mortgage. So, if you plan to use 2 separate lenders for each of the products, the bridging loan provider will require you to present evidence that your mortgage loan is lined up.

Industry Experience: While start-ups and beginner investors can still access commercial mortgages, having a strong track record in the relevant industry should be sufficient to convince the lender of your ability to achieve your plans.

Clean Credit: While there are some commercial bridging loan providers and mortgage lenders that specialise in customers with different types of adverse, having clean credit is usually enough to convince the lender that you are low-risk.

Good Security/Healthy Deposit: Bridging loans typically require a deposit of 30 percent while commercial mortgages may require anything between 20 and 40 percent depending on the risk level. Putting down more than the minimum may lower the risk level, while deals with a 100 percent loan to value (LTV) ratio can be obtained if you can put down additional security such as another asset or property.

Profitability: It is essential for the commercial mortgage component. The lender may carry out an assessment of the earnings before tax, interest, depreciation, and amortisation of your business or the business you plan to buy, and may ask to see a business plan with future projections so that they know the mortgage is affordable.

If you fail to meet all the above criteria, you don’t need to panic. Bridging loans and commercial mortgages are typically assessed on a case-by-case basis, so with the assistance of a whole-of-market broker, you can find a specialist lender that can offer you a lifeline even though others might have you turned you down.

 

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