Commercial bridging loans explained and why act now

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This article covers the logic behind obtaining commercial bridging loans and their multi-functionality. Given the current market conditions, the faster one secures a bridging loan and subsequently sells, the more likely they are to secure a good price.

Given the current economic environment, there has been a tightening of lending criteria by mainstream lenders, which has led to an increased demand in alternative property-backed financial products. Bridging loans secured against commercial property are an example of such alternative products currently available on the market; they are used to quickly obtain funds for the purpose of purchasing an investment property, releasing funds from an existing property, or for refurbishment and development purposes.

Typical commercial properties include office buildings, shops units, industrial property, hotels and public houses, as well as semi-commercial alternatives, however, in the case of using semi-commercial property as security, the property in question will need to be at least 40% commercial.

Property investors and private landlords have become increasingly interested in commercial bridging loans, given that the value of the property is significantly boosted once refurbishment or renovation work has been completed. Properties with an enhanced value and with tenants that have been in place and paying rent for 6-9 months are viewed as attractive options by lenders offering buy-to-let mortgages. Such mortgages, once obtained, are then used to redeem the bridging loan.

Commercial bridging finance offers increased flexibility and creative solutions for borrowers at a time when conventional credit has been refused. They are often obtained when buying under value from an LPA Receiver, purchasing prior to receiving planning permission, or when one wishes to borrow against value rather than purchase price. In addition, bridging loans can be secured in order to repay the outstanding value of auction purchases.

The terms for commercial bridging loans range from 1 to 36 months and have a flexible upper limit, depending on the scheme and the principals involved. The funds obtained can also be used for a variety of business reasons, such as obtaining working capital, avoiding monthly payments, financing unexpected tax liabilities and covering short term cash-flow issues. With some intermediaries offering rates from 0.45%, commercial bridging loans are considered to be a cheap and time-efficient solution for borrowers.

Reflecting upon the current property market environment, there are news of new taxes and regulations putting pressure on buy-to-let investors, as well as of some owner-occupiers reconsidering high-risk property moves as interest rates start to rise and mortgage affordability rules remain tight. However, despite slowing price growth in former hotspots and stagnating transaction levels, many professionals believe that the current uncertain market conditions offer opportunities for property bargains and may help borrowers to secure better terms for a bridging loan.

With the governor of Bank of England, Mark Carney, delivering a warning last month that house prices could be around 35% lower after a disruptive “no-deal Brexit”, it may be advantageous to consider forwarding any potential investment and subsequent sale decisions, in order to obtain the lowest possible financing rates and maximise the profit margins at the time of the exit.