Decision Time: Commercial Mortgage vs Bridging Finance
Whether you’re a developer or a buy-to-let landlord, the first thing that will strike you about the UK property market is how it seems to grow in value year on year, in spite of the political and economic challenges that have arisen. As such, this has made property an invaluable asset to possess, but not an easy one to acquire. However, if you’re looking to start a property portfolio and expand your business into new markets, there are two products available that could help. Commercial Mortgages and Bridging Loans present two entirely different methods of realising your property goals, but in order to ascertain which of these is most suitable, you must ensure that you fully understand how they work before placing an application.
Commercial Mortgages are long-term finance agreements that can last up to 20 years and are usually secured against property. So, depending on the purpose of the agreement, security could be provided in the form of the property that you’re purchasing, redeveloping or another property in your portfolio. Yet, although funding often starts at £50,000, it’s based upon the total purchase price or worth of the property involved. Therefore, there’s no maximum limit regarding how much capital you could borrow other than what the lender is willing, or able, to provide. If your application is successful, anything that you do borrow will need to be repaid using a Fixed Monthly Repayment Scheme. Should you possess the necessary capital, you can choose to settle the agreement early but may be charged a Redemption Penalty as a result. Plus, it’s also worth noting that the interest on each month’s repayment could vary depending on whether you choose a Fixed or Variable Rate agreement.
So if you’re interested in applying for a Commercial Mortgage, one of the first things you need to do is place a portion of your own capital into the agreement. This usually starts from 20% of the property’s total purchase price or worth. However, if you’re looking to gain a favourable interest rate and reduce the amount you’ll need to borrow, you could offer up to 40%. In addition, you’ll also need to grant lenders access to your credit profile and submit a number of vital documents, including recent and past bank statements, profit and loss statements, trading accounts, turnover reports to asset, liability, income and expenditure summaries.
On the other hand, Bridging Loans are short-term solutions that can last up to 12 months (or 18 months if using an unregulated lender) which are also secured against property. In order to apply for a Bridging Loan, you’ll need to provide lenders with access to your credit profile, as well as a variety of documents which could include recent and past bank statements, profit and loss statements, turnover reports or tax returns. In addition, you must also lay down a clear exit strategy outlining how you intend on raising the necessary capital for settling the agreement on time. So, for example, are you selling a property in your portfolio or releasing equity in one of your unencumbered assets (equipment, machinery, vehicles or property)? Nevertheless, in order to make an informed decision and be sure that this type of funding is suitable, you must make certain that you fully understand how Bridging Loans work.
Bridging Loans are unlike any other finance solution you may have encountered. This is mainly because the Principle (money borrowed) and the interest are handled as two entirely separate aspects of the agreement. As such, when negotiating a Bridging Loan, the first thing you need to consider is how you intend on resolving the Principle, which will also affect when the agreement matures. This is achieved by choosing either an Open Bridge or a Closed Bridge.
- Open Bridge: agreements don’t hold you down to a specific date so only require the Principle to be fully repaid during an agreed period (e.g. within 12 months). As such, this option could prove useful if you haven’t agreed a set completion date.
- Closed Bridge: agreements, on the other hand, require the principle to be fully repaid by a set date.
Once this has been agreed, the next step is deciding how you intend to resolve the interest that you will incur. To that end, you have 3 options available: Monthly Interest Payments, Rolled-Up Interest and Retained Interest.
- Monthly Interest Payments: works by you making monthly interest payments until you’ve paid off the Principle (i.e. the agreement has matured).
- Rolled-Up Interest: takes the Principle and the total amount of interest generated, requiring you to resolve them both in a single combined repayment once the agreement matures.
- Retained Interest: allows you to borrow the interest that will be incurred for an agreed number of months, which you are also charged interest on. However, this is retained by the lender and acts as a protective buffer, so if you make monthly interest payments and happen to fall behind on a particular month, this will be used to pay it in your stead. Plus, once the agreement matures, some lenders may also reimburse you a portion of the funds that you did not use.
Need help sourcing the most appropriate finance agreement?
For many UK business owners, property is a prized asset that yields many benefits. However, with the cost of property consistently increasing on account of rising demand, it’s also an asset that is difficult to acquire. But if you’re looking to step onto the property ladder or expand into new locations, there are a variety of solutions available that could help, including Commercial Mortgages, Bridging Loans, Property Development Finance or even Commercial Property Refinance. The only obstacle standing in your way could be uncertainty regarding how these products work and how to successfully negotiate a cost-effective agreement, which is why speaking with a qualified business finance professional could prove invaluable.
At Rangewell, we’re an Access to Finance specialist and have mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if you’re looking to source an appropriate and affordable agreement for your goals, apply for Business Finance today or find out more with Rangewell.