Bridging loans or commercial mortgages – what’s the difference?

If you're financing a business or investment property, you may find that both bridging loans and commercial mortgages come up as options. They are far from being interchangeable products. Choosing between them depends on your timeframe, your plans for the property, and your longer-term financing needs.

This guide explains the key differences between the two, and helps you work out which is the right fit for your circumstances. 

What is a bridging loan?

A bridging loan is a short-term finance product, typically used to "bridge" the gap between an immediate funding need and a longer-term solution, such as selling a property or refinancing onto a mortgage. Bridging loans are usually taken out for terms of up to 18 months – sometimes as much as 24 months.

What is a commercial mortgage?

A commercial mortgage is a longer-term loan secured against a property used by the borrower for business purposes, or as a commercial investment property (let out to third party business tenants). These mortgage terms typically run from several years up to 25 years or more, in a similar way to a buy to let mortgage.

Key differences between bridging loans and commercial mortgages

Based on those simple explanations, there are clear differences between these two finance product types, beyond the surface-level similarities. 

However, things can get confusing when commercial mortgages and bridging loans are used together in sequence to fund a business investment. This common scenario is explained below and as such, the devil is in the details when deciding which best suits your purposes. 

Speed of funding

Bridging loans are designed to be arranged quickly, often within a matter of days or weeks (with commercial specific bridging loans), which makes them well suited to time-sensitive purchases, such as when buying property at auction or deals that would otherwise fall through over long timeframes (e.g. where a vendor wants a quick sale, or a competitive deal is on offer that could be taken up by someone else who has funds lined up).

Commercial mortgages take longer to arrange, as lenders carry out more detailed underwriting, including a full assessment of trading history, income and, in many cases, business accounts.

Bridging lenders carry out thorough checks too, but these focus more on the property and the strength of your exit strategy, which are quicker to undertake and is part of why bridging applications can typically move faster.

Loan term

Bridging finance is short-term by design, generally ranging from a few months to a maximum of two years.

Commercial mortgages are structured for the long term, often running for a decade or more, in line with the borrower's (or their tenants’) ongoing use of the property.

Rates and costs

Bridging loans carry a higher rate of interest than a commercial mortgage. This is due to their short-term nature and typical reasons for the borrowing that tend to be higher-risk for the lender, such as property renovations, cash injections for business growth before moving to commercial mortgage, and set up periods of a new business.

Bridging loans cover these shorter term plans, whereas commercial mortgages are for longer term planning and continued business performance.

For commercial mortgages, the lender's risk is spread across a much longer repayment period, alongside greater scrutiny of the borrower's ability to service the debt over that time.

Property criteria

Bridging lenders are often willing to lend on properties that are not yet mortgageable. For example, properties requiring renovation, without a kitchen or bathroom, or otherwise considered uninhabitable.

Commercial mortgage lenders require the property to already be in a useable condition, since the loan is based on the property's ongoing income or use, not a future improved state.

Exit strategies

Because bridging loans are short-term, lenders require a clear exit strategy showing exactly how you intend to repay the debt. For property investors, this is commonly achieved by selling the asset or refinancing onto a long-term solution, such as a buy to let or commercial mortgage, once the property meets standard lending criteria.

Commercial mortgages, by contrast, are often the ultimate exit route from a bridging loan rather than requiring one of their own — the regular payments are structured to manage the debt over the length of the term. 

This applies most cleanly to capital repayment mortgages – if a commercial mortgage is interest-only, the capital balance still needs a repayment vehicle (a way to repay the lump sum originally borrowed) in place for the end of the term.

When a bridging loan might be the right choice

A bridging loan is likely to be the right option if:

• You need to move quickly. For example, you need to secure a property at auction or beat a tight completion deadline. 
• The property is not currently in a mortgageable condition, and you plan to renovate or convert it before refinancing. 
• You have a clear, realistic plan to pay the loan within a short timeframe, e.g. through sale or refinance. 
• You need a short-term cash injection to bridge a temporary gap in business cash-flow, while a larger transaction completes.

When a commercial mortgage might be the right choice

A commercial mortgage is likely to be the right option if:

• You are buying or refinancing a business premises that is already in a suitable condition to trade from or let out. 
• You want the certainty of a long-term payment structure, rather than a product designed to be paid quickly. 
• Your priority is a lower overall cost of borrowing over time, rather than speed of access to funds. 
• You are looking to hold the property, or the business it houses, for the medium to long term.

Using bridging finance and a commercial mortgage together

It's also worth knowing that these products are often used in combination, rather than as alternatives. A common scenario is:

• A bridging loan is used to purchase a property quickly, particularly one needing renovation or one bought at auction.
• Once the property has been improved or its condition addressed, it becomes eligible for longer-term finance.
• A commercial mortgage is then used to refinance the bridging loan, moving the borrower onto a lower, long-term rate.

This is a well-established route for property investors and business owners looking to add value to a property before committing to long-term finance on it.

How Commercial Trust can help

At Commercial Trust, we arrange both bridging loans and commercial mortgages, which means we can advise you on the right product for your circumstances, rather than steering you toward one type of finance because it's the only one we offer.

We have:

• A wide variety of product options across market-leading bridging and commercial mortgage lenders. 
• Specialist knowledge of lender criteria for property types that don't fit a standard mould, including currently uninhabitable properties, semi-commercial premises, and complex trading structures.
• Support planning a full journey from bridging finance through to long-term refinance, if that route makes sense for you. 
• A dedicated team managing your application from enquiry through to completion.

If you're not sure which route suits your plans, get in touch with our team to talk through your circumstances.