Difference Between Commercial And Residential Bridging Loan

Difference between commercial and residential bridging loan

Borrowing activities in the United Kingdom are once again heading to an all-time high. At this time, Bridging loans are proving a great alternative to traditional bank loans. Both the commercial and residential bridging loan are a quick way to access funds. It is because a bridging loan is a short term debt that offers quick funds to the borrowers so that they can fulfil their current financial needs.

It bridges the gap when you wait for long-term or permanent funds to become available to purchase something or meet your financial obligation. Typically this type of loan is used by the property investors or developers to complete the purchase of a new property before the sale of existing property.

There are different types of bridging loans which mainly include open and closed bridging loans. The main difference between these two types of loans is due to the repayment terms. There is no fixed repayment date in an open bridging loan, while in a closed bridging loan, you have to repay the loan amount at a fixed date.

Otherwise, you have to pay late payment charges, or in extreme cases, your property will be repossessed. You can take out a bridging loan as a first, second and third charge loan. Moreover, a bridging loan can be used for several purposes other than the purchase of property before the sale of another one.

Most bridging loan providers offer commercial and residential bridging loans. As a borrower, you need to understand the difference between these types of bridging loans.

Read on to find all the necessary information about commercial and residential bridging finance.

bridging commercial

What Is A Commercial Bridging Loan?

A commercial bridging loan is a short term secured debt. This type of loan is secured against commercial property. If you want to take out a commercial bridging loan, you need to have a clear exit strategy to repay the loan. This exit strategy can include the sale of a property, refinancing through long term borrowing such as commercial mortgage or funds from the business. 

Bridging finance offers quick funding that is why business owners are attracted to such a loan. For example, if you want to purchase a property at an auction, you have to pay the cost of the property within 28 days.

In this case, if you go for a mortgage, you can not get the funds at the right time. Therefore, a commercial bridging loan would be a perfect option for getting funds and completing a property purchase at auction. 

How Can You Use A Commercial Bridging Loan?

You can use a commercial bridging loan for a number of purposes. Some of which are as follows:

Resolve Business Cash Flow Issues

In all businesses, at times, infrequent expenses arise that can disturb your business cash flow. It may include paying tax bills and purchasing new equipment or stock. You can get a commercial bridging loan by using your commercial property such as a warehouse, office, industrial unit or barn as security.

You can use this funding for purchasing new equipment, paying tax bills or bank overdrafts. However, you have to repay this loan amount before the maturity date of the bridging loan either by selling a property or refinance other forms of business loans.

Purchase Of New Commercial Property

Suppose you need funds to purchase a new commercial property for the purpose of investment or to expand your business. You can take help through commercial bridging finance. It is because of the speed of arrangement of bridging loans.

You can get funds in your bank accounts usually within two weeks after approval of the loan application. Therefore, you can use commercial bridging loans for purchasing a new property and expanding your portfolio.

Cover Staffing Costs

As a responsible business owner, you have to respond to the demands of your staff that result in an increase in wages cost. If you offer credit to your clients, you may find cash flow issues when paying wages to your staff.

Bridging loan proves an ideal solution in such a situation, and you can use funds from this type of loan to pay wages. You can repay the loan amount when you receive payments from your clients.

Renovation Of A Property

Another important use of bridging loans is that you can use them for the renovation of the property. For example, property investors purchase non-standard properties at low cost and then renovate to increase their value.

You can use funds from bridging loans to renovate this property. Moreover, you can not take a mortgage on a non-standard property, so you can also use a bridging loan to renovate a property to make it mortgageable.

What Is Residential Bridging Loan?

A residential bridging loan is a type of short term loan that is designed to bridge financial gaps. It is a great alternative to the traditional mortgage, especially when you need to renovate or purchase a property within a short timeframe.

Loans are offered on an interest-only basis, and you can pay interest rates either monthly or at the end with the loan amount. As it is a short term loan, usually you can take it for 12 months, but now some lenders offer bridging loans for longer times.

bridge to let example

How You Can Use A Residential Bridging Loan?

The uses of residential bridging loans are similar to the uses of commercial bridging loans. There are several reasons for which you can take out residential bridging loans instead of standard mortgage loans. Some of which are as follows:

  • Quickly raise funds to avail property investment opportunities or expanding business.

Renovation or refurbishment of your property.

  • Purchasing a property at an auction.
  • Purchasing a property before the sale of your existing property.
  • Extending lease of your property before the sale.
  • Paying your debts as they fall due such as petitioning for bankruptcy.

These are only some examples, although you can apply for residential bridging loans for any legal use.

Commercial Bridging Loan Vs Residential Bridging Loan

The difference between these two financial products is not due to the purpose of use, but it is due to the type of property you are using as security. If your loan is secured against a residential property, it is known as a residential bridging loan.

In contrast, if you use commercial property as collateral, the loan is called a commercial bridging loan. Most bridging loan providers are likely to offer loans on residential properties, but there are a few lenders who accept commercial or mixed-use properties as security.

Another difference between these loans is due to regulation. The residential bridging loans are FCA regulated, while commercial ones are still unregulated. It is also a reason that lenders who offer commercial bridging loans are more agile in approving the loan application. 

Who Can Take Out Commercial Or Residential Bridging Loan?

You can take out a Regulated or residential bridging loan only for a property in which you or your close family members live. It means only individuals can take such a type of bridging loan.

On the other hand, we can see that unregulated or commercial bridging loans are usually taken against the properties that are used for investment purposes. It means a wide range of borrowers can take out this type of loan, such as limited or unlimited companies, individuals and members of partnerships.

How Is The Interest Rate Calculated And Charged?

For both the residential and commercial bridging loan, the interest rate is set according to the Loan-To-Value (LTV). The more you borrow in proportion to this value, the more interest you have to pay. Typically, lenders do not allow you to lend more than the value of the property you are using as security.

For residential ar regulated bridging loans, lenders charge an interest rate on a retained basis. It means that you do not have to pay monthly instalments. Instead, the amount of interest is added to the loan amount. And usually, the loan amount and the interest is paid in one go at the end of loan terms.

With commercial or unregulated bridging loans, you have the option to choose whether you will pay monthly interest or pay a lump sum amount at the end of the loan term. If you are taking out a loan for a longer period and your business is not facing any cash flow problems, you should prefer monthly interest payments. This way, you can avoid interest on interest by keeping your payable amount to a minimum.

is it better to buy commercial property or residential property

How Can You Put A Loan To Work?

One most significant advantage of residential and commercial bridging loans is that there is no restriction on the use of loan amounts. Moreover, there is no strict examination of your business accounts to decide whether you qualify for a loan or not.

Suppose you want to expand your business or purchase new equipment to complete a big order within the due date. In such circumstances, a commercial or residential bridging loan can be an ideal solution to get quick access to the funds that you need.
However, you have to repay the loan within a specific time frame. Therefore, you must have a clear exit strategy to get fast loan approval.

Which Type Of Loan Can You Take On Mix Use Property?

A property is called a residential property when at least 40% of the property is being used as a dwelling. Similarly, if you want to take out a commercial loan, the commercial element of your property must be at least 40% of the property.

It means that when you want to get a loan on a mixed-use property, you will be either eligible for a commercial or a residential loan. In addition, the bridging loan interest rate for residential properties is relatively lower than the commercial bridging loan.

Thus, if you have options, you should make like-for-like comparisons to ensure that you are getting the best deal.

What Should You Choose: A Commercial Or Residential Bridging Loan?

Both commercial and residential bridging loans offer you benefits and flexibility to use the loan amount for any purpose. However, choosing a loan type depends on your preferences, requirements and affordability.

Though there are exceptions, the interest rate on residential bridging loans is lower than a commercial one. Therefore, you should keep it in mind to put some of your money on the interest rate.

residential property investment uk

How To Get A Fast Loan Approval?

Whether you are taking out a commercial or residential bridging loan, your loan application will proceed faster. One thing that affects your loan application the most is the exit strategy.

So if you want to get quick loan approval, you must have a strong exit strategy to make sure that you will repay the loan amount at the right time. Other than that, if you have valuable property to use as collateral and a clean credit score, the lenders are more likely to grant a loan.

Although you can get a bridging loan when you have a bad credit score, you have to pay a high-interest rate. So sometimes, you have to pay extra to proceed with your loan application fast.

Compare The Market With Short term

The demand for bridging loans (commercial & residential) is increasing day by day due to their benefits to the borrowers. With this increasing demand, the number of bridging loan providers is also increasing in the UK. It can be challenging for you to choose the best provider. Financial experts suggest you shop around and read customer reviews to find the transparency of the lenders.

In this hectic routine, it might not be possible for you to go to each lender to know about their services and loan terms.

To make this comparison without any hassle, you can use online comparison sites like shortterm. By using our services, you can get a quick bridging loan comparison without wasting your time and energy.

We have a team of qualified financial experts who provide you with a comparison of top bridging loan providers of the UK and assist you in making bridging loan applications for any purpose.

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