How do bridging loans differ from commercial mortgages?

A bridging loan provides short-term finance to help fund the purchase of one property while another awaits sale or until a building project can be funded through a traditional mortgage. These can be used by individuals or businesses. In comparison, commercial mortgages are for companies to buy a property and come with a longer term.

While both products are a loan that is secured against property, they do also have a number of differences:

Usually a bridging loan is used for a matter of days or months compared to a commercial mortgage, which has a longer duration of years, if not decades. The shorter duration is due to the purpose of a bridging loan; such as a temporary provision to allow you to buy a property before an existing one has sold or secure longer-term finance once a renovation or conversion project is completed.

Commercial mortgages usually have certain restrictions on the condition of the building. Bridging loans are more flexible with fewer criteria to qualify, for example they can be used to help fund a self-build project until it qualifies for a mortgage.

A bridging loan can be used by an individual to fund a short-term gap between buying and selling a residential or a commercial property. A commercial mortgage is only available for business entities for commercial properties.

Bridging loans taken out by a business or for investment purposes are unregulated, in the same way as a commercial mortgage. Bridging loans taken out by an individual for a residential purpose would be a regulated sale. This means you would need to meet the affordability criteria as set out for a traditional mortgage.

Bridging loans that are unregulated are much quicker, sometimes only taking days to be agreed. Commercial mortgages, while unregulated, will still typically take weeks to complete.

Usually bridging loans are paid for through the sale of the property used to secure the loan or another property. This means they don’t require the same monthly payments as a commercial mortgage, as the interest is often rolled into the loan. As a result, proof of affordability is reduced, making these more accessible to those on lower incomes.

Most commercial mortgages will apply an exit charge if you leave before the contracted term. However, a bridging loan usually offers you the opportunity to repay the loan before the agreed period penalty-free.

Bridging loans usually come with a higher interest rate than commercial mortgages, due to their short-term nature and the risk that the property waiting to be sold may not do so in a timely manner.

A bridging loan is a useful way to finance a property purchase when you need to do this quickly. While they have many differences to commercial mortgages, they are both secured against your property, which means if you default on your payments your property could be repossessed.