Are you buying property for your own use, or as an investment? Does your business need a cash injection to finish a renovation project? Are you looking to grow your property portfolio? Or do you need fast access to short term flexible finance?
Our guide takes a closer look at the different types of property finance available to help seize your next business opportunity, expand your existing business or as you enter into the world of property development.
What is a Commercial Mortgage?
A commercial mortgage can be used to buy or refinance land or property intended for commercial use. As with a standard residential mortgage, capital is borrowed and secured against a property.
As well as being used to purchase property, commercial mortgages can also finance property development or be used to raise capital to expand an existing business.
While commercial loans are offered on an unsecured basis, and often capped at a certain level, commercial mortgages let customers borrow more money on a secured basis, using the property as security.
What can I use a Commercial Mortgage for?
Primarily a commercial mortgage is used to purchase commercial premises, however if you’re using property as a security to release funds, then the cash can be used for any legal purpose.
How does it work?
A mortgage on a commercial property works in a similar way as a residential mortgage on a house or flat.
Terms commonly last up to 25 years (most fall into the 15-30 year bracket), and most lenders will let you borrow up to 70% of the property’s value, with the intention that your business will repay the capital in regular instalments.
You’ll need a deposit, but it’s also possible to use another property you own as security, if you hold enough equity.
If the commercial finance is offered on an interest-only basis, you’ll only need to pay the interest each month, settling the capital loan debt at the end of the term.
Terms can range between 3 and 40 years – anything less than 3 years would more commonly be a Bridging Loan.
What are the benefits of a commercial mortgage?
Here are some of the main reasons why individuals and businesses are choosing this funding option.
You own the property and so benefit from any increase in its value
Financial planning is more straightforward as commercial mortgages are typically fixed payments
Assuming it’s an owner operated premise, you aren’t spending money on rent which you don’t see a return on, and if you’ve additional space, this can be rented out as an additional income stream
Lower interest rates than unsecured borrowing
Choosing fixed monthly repayments means you can accurately use them in your business planning and forecasting, enabling you to structure the finance of your business with more certainty
What is a Bridging Loan?
Also known as short term funding or Gap funding, a bridging loan is a short term loan for businesses usually secured against a tangible asset, where access to the loan is available very quickly.
Its purpose is to bridge a gap in finance to support a business during a transition in finance or to meet a tight deadline. When a more permanent form of finance is found, the bridging loan is repaid in full.
In the past, a bridging loan was mainly to fund property purchases, auction buying and property developments because there was a clear commercial purpose at the end to reassure the lender that they would get their money back. However, a bridging loan can be used for a range of different purposes, not necessarily property purchases. All a lender will want to see is a clear exit plan so they can recoup their money.
Typically, businesses exit a bridging loan when moving to another financial product such as a mortgage, or they make a sale or have a guaranteed income in place.
Due to the short term nature of a bridging loan, the interest rates can be high, but lenders can be flexible with interest repayments, allowing a lump sum of interest to be paid at the end of the loan.
How does it work?
Essentially, a bridging loan involves offering a property or asset as security to a lender, and using the value/equity within this property or asset to secure a loan – normally on a short term basis of no more than 12 months.
Usually, the funding will be via a 1st mortgage over the property (Breadalbane has access to funders who will loan on a 2nd charge basis, if there is sufficient equity).
Each lender has their own lending parameters that dictates then maximum that can be lent, but typically between 60-70% of the value of the security can be achieved.
Once the value of the security has been agreed, a loan offer is produced and once the offer is accepted and the security in place, the funds can be drawn.
What are the benefits?
Here are some of the main reasons why individuals and businesses are choosing this funding option.
A bridging loan can be arranged in as little as 72 hours, often much faster than other forms of finance, with approved offers often in place within 24 hours
As bridging loans are a form of asset-backed lending, this means no lengthy checks as the loan is secured against an asset of value
You don’t need to worry about rising interest costs or monthly rates as the loan is paid back in a few weeks or months, meaning that interest is controlled and the loan is affordable. If sufficient equity in the security exists, you may also be able to roll in the fees and repayments, meaning there is no impact on your monthly cashflow
While a bridging loan is typically used for property purchases, it can be used for a range of different purposes, often with no questions asked. The only thing the lender will want to see is proof that you can pay back the loan and that the security has a clear and realisable value to cover the loan amount
What is Development Finance?
Development Finance is the general term for all financing used to help fund a new development, whether residential or commercial, covering all types of mortgages and bridging loans.
The finance is usually for around 60-70% of the development’s current market price, not the value when any work on it is completed. It’s usually funded via tranche drawdowns, meaning you can draw funds out of your mortgage to pay for the work.
When would you use it?
Development Finance can be used for office refurbishments, converting residential space into a commercial property, or to help fund a planning application on a piece of land or property.
It can cover everything from a single unit project to larger multi-unit schemes and is often used for Build-to-Let projects.
It’s also useful to cover sales period funding, providing a business income during the time between development completion, and letting it out or selling it.
Speak to the team today to find out how our range of property finance options, from commercial mortgages to bridging loans can help support your business’s growth.
