What are the differences between commercial and residential bridging loans?

Using a bridging loan for property development has become a key financial tool for most developers, both in commercial and residential builds.  So what are the differences between commercial and residential bridging loans?  

Unsurprisingly, residential bridging loans are used for the purchase or renovation of residential property, or to acquire land/property that will be developed for residential use.  This would also include where a developer is converting an existing commercial building (such as a church or office) to become residential.

Commercial bridging loans are used for the purchase or development of a site/ property that will be used for commercial purposes.  This would include, but is not limited to, shops and retail space, offices, restaurants and bars, warehouses and gyms.  

In developments that have both commercial and residential units, such as flats above retail space, then a semi-commercial bridging loan would be the most appropriate financing.

Both commercial and residential bridging loans have the same core elements:
·      quick arrangement time, from 3 days to 3 weeks
·      secured against an asset or assets, usually property
·      short-term funding from 1 month to 24
·      used to alleviate funding gaps between buying and selling/refinancing
·      options for repaying the interest, including monthly, rolled-up or retained
·      no early repayment charges.

The main difference between a residential and commercial bridging loan is the borrowing costs. Commercial bridging loans UK wide tend to be more expensive for the borrower.  This is because lenders perceive commercial developments to be more risky than residential, where it is easier to liquidate the assets in the event of a default on repayment.

So to safeguard the lender and mitigate the risks, rates are higher on commercial than residential bridging finance (and on all types of finance).

What is a commercial bridging loan?

Each type of loan has differing criteria, so it’s important to understand exactly what is a commercial bridging loan?  As mentioned, bridging loans are typically used when a borrower needs to access cash quickly to plug a funding gap. Examples are buying property at auction, where the time period for completion is usually just 28 days and a 10% deposit is needed on the day, or buying a new business premises before selling the current one to allow an uninterrupted business transition. 

Using a commercial bridging loan also allows developers to maximise opportunities and invest where traditional financing wouldn’t be available, such as brownfield sites (previously developed land that is no longer used) or run-down commercial premises.  Once the developer gains planning approval for the site or completes renovations on the premises, they can then arrange long-term finance.  With any commercial property bridging loan, the exit strategy must be defined from the outset, whether selling after devolvement or refinancing onto a commercial mortgage.
 
Lenders essentially break into two groups - pure residential or part commercial.  Any element of commercial property in the project, even if it’s the smallest proportion, would rule out pure residential lenders and funding would have to be arranged through a commercial bridging loan lenders. 

Commercial bridging loans can also be used for reasons unrelated to property development, such as a start-up venture, providing a business with working capital, buying equipment and machinery or financing tax liabilities.  So, what is a commercial bridging loan?  In short, it’s a form of funding secured against commercial property that typically helps borrowers add value or change use to create new or additional revenue streams.

What is a residential bridging loan?

Following on from commercial bridging finance, the next logical question is what is a residential bridging loan?  Like the latter, it’s a short-term financial arrangement to plug funding gaps, but a residential bridging loan is only for property (or land) that will be solely residential. They are commonly used in broken property chains, to secure land prior to planning permission being granted, where a buyer wants to secure their dream home before selling their current property, as well as auction purchases. Bridging loans for residential property allow developers to buy uninhabitable housing (no kitchen or bathroom facilities) and therefore ineligible for traditional residential mortgages, which can then be developed and sold/let. Likewise, a bridging loan can be used to fund renovations or conversions that can be completed quickly, rather than applying for a full development finance package. Unlike traditional mortgages, residential bridging loan applications are likely to be decided on the value of the purchase property and the exit strategy more than a borrower’s ability to meet the repayments.
 
Residential bridging loans can be either regulated (by The Financial Conduct Authority (FCA)) or non-regulated. A regulated bridging loan is when the security, or property the loan is secured against is one that the borrower, or their immediate family, lives in or will live in and they share the same regulations as residential mortgages.

When deciding between regulated vs non-regulated loans, it’s important to understand that regulation comes with constraints: there is significantly more bureaucracy, longer processing times and low capacity to meet tight deadlines.  Conversely, non-regulated loans can be arranged quickly and are flexible enough to be tailored to a borrower’s situation.  The FCA does not regulate bridging loans used for investment property, buy-to-lets, or commercial real estate. Therefore, all commercial bridging loans are unregulated.

What are the types of bridging loan?

The next key question to answer is what are the types of bridging loan? As with most finance, there are different options for borrowers.  Whether arranging commercial or residential bridging finance, the loan will fall under one of two types of bridging loan:

·      Closed-bridge loans are when borrowers have a set date for repaying the loan.  This could be when a completion date for sale has been fixed.   
·      Open-bridge loans are when the borrower sets out a proposed exit plan for repaying but a definitive date is not set.  There will be, however, a cut-off point set by the lender by when the loan must be repaid.

Bridging finance is available on a  first or second-charge basis, referring to which lender will recoup their debt first (by repossessing the securing assets) if the borrower defaults.  Logically, first-charge loans are repaid first so lenders are more willing and flexible with loan arrangements and rates are lower than second-charge loans where the higher risk is offset by higher interest charges.

For example, if a homeowner has a mortgage then secures additional borrowing via a bridging loan against the house, the mortgage would be the first-charge lender and the bridging finance would be second-charge. Second-charge loans are a convenient way to access equity in a property without fully remortgaging. 
 
‘What are the types of bridging loans?’ can be more broadly answered though.  Basically, everything discussed so far is a type of bridging loan, including commercial, semi-commercial, residential, regulated, non-regulated, closed-bridge, open-bridge, first-charge and second charge bridging loans.  

With so many different types of bridging loans, finding the best deal can be difficult, which is where brokers who specialise in bridging finance are invaluable.  At Brickflow, we compare over 80 lenders in minutes, so finding the right deal for the right project is a whole lot easier with us.