Bridging finance can be useful in a variety of scenarios, from restoring broken property chains to funding workspace growth. Even in the most difficult situations, this versatile form of short-term borrowing may be useful to everyone from part-time landlords and restoration professionals to corporate directors, partners, and single traders.
All types of bridging finance have the same fundamental structure: they’re short-term loans secured by property, which means the property could be repossessed if the loan isn’t repaid on time. However, as you look into different bridging finance choices, you’ll realise that there’s a contrast between residential and commercial loans. Here, we’ll explain the differences and assist you in determining which type of lending is ideal for you.
The key distinction between residential and commercial bridging finance
When it comes to most traditional sorts of borrowing (such as high-street bank loans), the options you’re presented with are primarily determined by the loan’s purpose. If you require money for a new business venture, for example, you may be sent to the bank’s small business team. Even with property as collateral, meeting the bank’s financing conditions might be difficult — and you should expect your company ideas to be scrutinised closely.
Lenders who specialise in bridging finance adopt a different strategy, distinguishing between residential and business loans. This distinction, however, is not related to the loan’s objective; rather, it refers to the sort of property used as collateral. As a result, a home loan might be used for commercial reasons — that is, to meet the needs of your firm.
Residential bridging loans are further classified as either ‘regulated’ (a loan secured by the property where you live or intend to live) or ‘unregulated’ (not secured by the property where you live or intend to live) (on a dwelling that is not your primary residence, such as a buy-to-let property).
If it’s a mixed-use property, what kind of loan should you get?
For a residential bridging loan to be approved, at least 40% of the property must be used as a residence. Similarly, in order to qualify for a commercial loan, the commercial portion of the property must typically account for at least 40% of the total value.
If the loan is secured on a mixed-use property (such as a shop with a flat above it), you may be eligible for a commercial or residential loan. Residential loans have lower interest rates than commercial loans, making them the natural choice in many instances. If you have various loan options, make sure you do a like-for-like comparison, paying special attention to how interest is calculated, to guarantee you’re getting the best price.
Who can get commercial or residential bridging finance?
Only a dwelling in which you or a close family member lives is considered a ‘regulated’ bridging loan. As a result, this form of loan is exclusively available to people (or trusts).
Unregulated residential bridging loans, as we’ve seen, are for houses kept for investment purposes, whereas commercial loans are for commercial properties. As a result, each of these loan kinds are available to a considerably broader spectrum of borrowers, including limited and unlimited corporations, PLCs, partnership members, and individuals.
What is the applicable rate of interest, and how is it computed and charged?
Interest rates are set using the loan-to-value ratio for both residential and commercial loans (LTV). The greater the rate of interest, the more you borrow in relation to the value of the property.
Interest is levied on a ‘retained’ basis for regulated home bridging loans. Instead of making monthly payments on the loan, the lender adds the interest chargeable to the balance of the loan (essentially charging interest on interest), and the entire amount due is usually paid back in one lump sum when the arrangement ends.
You can choose whether interest is retained or serviced with unregulated residential and commercial bridging finance. You pay off the interest on serviced loans each month, leaving you with only the lump amount capital to repay at the end. If you are borrowing for a long period of time (e.g. 6 to 12 months) and your business cash flow allows you to make regular interest payments, this is always a good idea because you avoid paying ‘interest on interest,’ lowering the total amount payable.
How can I put bridging finance to good use?
One of the most appealing features of both residential and commercial bridging finance is the lack of legal constraints on the loan’s use. Furthermore, no forensic check of your personal or corporate finances is performed to determine whether you qualify.
Let’s say you need to upgrade your business’s facilities or equipment in order to fulfil a large order from a major new customer. A business or residential bridging loan may be the best alternative for quick access to the capital you require, depending on your circumstances. You have a clear exit strategy for repaying the debt because you know you’ll get paid for the contract within a specific timeframe (an essential requirement for any bridging finance arrangement).
Speak to F&M Finance today if you’d like to learn more about how to make the most of your property options.