What are the differences between commercial and residential bridging loans?
From repairing broken property chains through to funding workspace expansion, bridging loans can be useful ways to raise finance in a wide range of situations. From part-time landlords and renovation specialists to company directors, partners and sole traders, this versatile form of short-term borrowing can be beneficial even in the trickiest scenarios.
All types of bridging finance share a basic format: they are short-term loans with property as security, which means that the property is at risk of repossession if the loan isn’t repaid as agreed. That said, as you explore possible bridging finance options, you’ll notice that there’s a distinction drawn between ‘residential’ and ‘commercial’ loans. Here, we’ll explain this difference, and help you find out which form of lending should best meet your needs.
Residential and commercial bridging loans: the essential difference
With most traditional types of borrowing (high street bank loans, for instance), the options you are presented with tend to be based largely on the purpose of the loan. So, for example, if the cash is needed in connection with your new start-up venture, you may find yourself passed on to the bank’s small business team. Even with property as security for the loan, it can be hard-going to meet the bank’s lending criteria — and you can expect your business plans to be subject to close scrutiny.
Bridging finance lenders take a different approach: lenders make a distinction between residential and commercial loans. But rather than being linked to the purpose of the loan, this distinction refers to the type of property held as security. So it’s entirely possible to use a residential loan for commercial purposes — i.e. to meet the needs of your business.
Residential bridging loans are further categorised as ‘regulated’ (a loan on the property where you live or intend to live) or ‘unregulated’ (on a dwelling that is not your primary residence, such as a buy-to-let property).
What type of loan applies if it’s a mixed-use property?
At least 40% of the property has to be used as a dwelling for it to qualify for a residential bridging loan. Likewise, to be eligible for a commercial loan, the commercial element of the property must usually make up at least 40% of the property as a whole.
This means that if the loan is to be secured on a mixed-use property (such as a shop with a flat above it), you may be eligible for either a commercial or residential loan. Of the two types, interest rates on residential loans tend to be lower, making this the natural choice in many cases. That said, if you are faced with multiple options across both loan categories, make sure you carry out a like-for-like comparison — paying particular attention to the way in which interest is calculated — to ensure you’re getting the best deal.
Who can take out a residential or commercial bridging loan?
‘Regulated’ bridging loans only apply to a dwelling in which you or a close member of your family lives. So only individuals (or trusts) can take out this type of loan.
As we’ve seen, unregulated residential bridging loans relate to dwellings held for investment purposes, while commercial loans relate to commercial premises. This means that both of these loan types can be taken out by a much wider range of borrowers, including limited and unlimited companies, PLCs, members of partnerships — as well as individuals.
What level of interest applies, and how is it calculated and charged?
For both residential and commercial loans, interest rates are set with reference to the loan-to-value (LTV). The more you borrow in proportion to the value of the property, the higher the rate of interest.
For regulated residential bridging loans, interest is charged on a ‘retained’ basis. With this, you aren’t required to make monthly payments on the loan, but instead, the lender adds the interest chargeable to the balance of the loan (effectively charging interest on the interest) and the full amount owed is usually paid back in one go when you end the arrangement.
With unregulated residential and commercial bridging finance, you can opt for interest to be either retained or serviced. With serviced loans, you pay off the interest each month, leaving you with just the lump sum capital to pay off at the end. If you are borrowing for a relatively long period (e.g. 6 to 12 months), and your business cash flow enables you to make regular interest payments, this always makes sense as it means you avoid paying ‘interest on interest’, thereby keeping the total amount payable to a minimum.
How can I put the loan to work?
One of the biggest advantages of both residential and commercial bridging finance is that there are no formal restrictions on what the loan is to be used for. What’s more, there’s also no forensic examination of your personal or business accounts to decide whether you qualify.
Say, for instance, you need to upgrade your business premises or equipment to fulfil a big order for a major new customer. Depending on your circumstances, a commercial or residential bridging loan may be the ideal option for swift access to the funds you need. With the knowledge that you will be paid for the contract within a set timeframe, you have a clear exit strategy for paying back the loan (an essential requirement for any bridging finance arrangement).
If you’re interested in learning more about how to make the most out of your property options, browse our guide to property finance below or speak to West One today.