Complete Q&A Guide: Commercial Mortgage Bridge Loans
This article presents all of the variety of frequently answered questions about commercial mortgage bridge loans– especially for the reader to have a clear picture on what the above subject is all about.
Q1. What is a Bridge Loan?
Bridge loans are applicable as a means of short- term finance, or when instant bulky cash payments are required. The typical bridging loan is often repaid within 1 year- this is because the interest rates for this kind of funding is comparatively much higher than common high street financing. Hence, this type of bridge loan funding is [and again] only suitable for short term lending.
It has been quite a long time since investors and developers have been applying bridging loans– as this type of financing makes them acquire properties instantly and offering competition in the property development industry.
Commercial mortgage bridge loans can be a convenient source of short- term finance- given that there are proper exit strategies placed and that the borrower is obviously able to repay the above debts successfully within the given term. [Continue reading the remaining questions and answers below so that you can be fully convinced as to when or when not to apply for the above kind of financing].
Q2. What is the term length of the loan?
The minimum duration of a bridging loan is 24 hours and the maximum can be set up to 18 months- depending upon the borrowing circumstances of the individual. Typically, most bridging loans can be repaid within several months.
Q3. Why would someone want to use a Bridge Loan?
Typically, the above kind of finance can be applicable when investors want to purchase a property at an auction. Successful bidders are meant to fund the property bought at the auction within 28 days. However, the investor could lose the entire or a fraction of the 10% initial deposit used to purchase the property– if the investor does not pay within the above time frame. Also, the investor could miss buying the property for a competitive price.
Q4. What are the cases when financing a commercial mortgage bridge loan is best suggested?
Typical instances of accessing the above kind of finance are as follows:
- When purchasing a property without finalizing the sale of your own property.
- When constructing a property with the intention of selling the property.
- When looking to fund sudden business expenditure.
- To be cleared instantly with the arrival of lump sum pension payments.
- Building a new start- up enterprise right from its roots.
- When intending to revamp real estate.
Q5. What are the requirements of getting commercial mortgage bridge loans?
Even though the requirements of the above kind of financing can vary between lenders, the most common requirement to see from borrowers is the credit score or credit terms of the borrower.
Secondly, lenders would also like to check the type of collateral provided. Commercial mortgage lenders would actually check the current value of the property, the future value of the property after repair and the probability of the value of the property being appreciated.
Thirdly, the likely income levels would also be estimated which will result due to obtaining the above kind of financing. Rental incomes or lease incomes may be estimated- especially after repairing or renovating the property in concern. This can be used to devise the exit strategy of the above type of financing.
On the whole, it is always best for the borrower to consult the real estate agent as well as the lender or lenders of the above financing- in order to get some ideas as to whether commercial mortgage bridge loans are a suitable type of financing as per the requirements of the borrower.
Q6. What happens if I can’t repay my bridging loan when the term finishes?
The above kind of financing is meant to be a means of temporary lending and it is expected to typically repay the above kind of funding within the given time frame within the planned exit strategy.
Initially, the lenders of the above kind of finance will ask the borrower how to repay the above debt- which is the exit strategy. The above kind of finance will not be lent right at the beginning if there is no clear exit strategy. Common exit strategies include selling an [existing] property or even a refinancing strategy- the former being the most appropriate type of exit strategy. Credit checks may need to be approved by lenders if they see that the borrower may resort to the above financing to clear away any long- running financial debts.
Even responsible borrowers who possess good credit scores may suddenly face difficulties of being unable to repay the above financing- due to circumstances which isn’t their fault. Hence in all cases, the lender will communicate with the borrower about 3 months prior to the end of the term- so as to assess the situation of the borrower so that the above debts can be repaid on time. The lender can provide additional steps for the convenience of the borrower- like lowering the open market price of the property that is aimed to be sold.
There should be open communications between the borrower and the lender so as to take preventative measures due to any sudden financial calamity- hence ensuring the successful repayment of the above debt well on time, as well as keeping the property assets to the borrower which have been offered as security.
Q7. What Are the limitations of a Bridge Loan?
Generally, the interest rates can be variable and much higher depending upon the type of borrower and the application. Plus, if the exit strategy does not work out, then the lenders may have to take control over the collateral. This could result in additional legal costs, waste of time and money and loss of assets as a result of such callous dealings.
Q8. What is the time taken to acquire the above source of financing?
Borrowers are advised to seek the above kind of borrowing whenever such opportunities are available as early as possible- especially if the borrower needs to make any instantly important decisions without any disruptions. The amount of time to receive the above funding can actually depend upon the circumstances of the individual. However, the general procedure starts with 2 days to decide to take up the loan, followed by 2 weeks to accept the loan offer and another couple of weeks to complete the entire application.
Q9. What is the duration of the above kind of financing?
The length of the term for the above kind of financing typically lasts between 12 to 18 months depending upon the requirements of the individual borrower. However, most loans are typically repaid within several months from the date of receiving the above funding.
Q10. What is the cost of borrowing the above kind of financing?
The borrowing rates for financial products like the above are determined by the amount of security the borrower has to offer, the LTV Percentage and the Credit Rating of the borrower. Many financial lenders offer a wide range of funding options and can give advice on the type and amount of financing required- as according to the ever- changing needs of the borrower.
Q11. Highlight about the charges to repay the loan earlier?
The above kind of finance does not incur any charges of early repayment- unless if any penalty charges are incurred, for which the borrower will be alerted when applying for financial products like the above
Q12. Can I obtain the above source of finance despite of my credit rating being poor?
Depending upon the situation, the above kind of finance can be lent to individuals with lower credit rating- if the borrower can show proof of security against some collateral as well as a clear exit strategy so as to repay the loan back within time.
Q13. Can I obtain the above loan with a 2nd charge if I have been rejected by my first lender?
Depending upon the situation, the above kind of finance can be lent by a 2nd charge if the property in concern can show some form of equity as an interest. There is no authority or permission required from a 1st charge lender as the 2nd charge lender have been given proof of security as mentioned above.
Q14. Will my lender need proof of my income when applying for the above source of finance?
It can look good if the investor or property developer can show a sustainable level of regular income. However, showing any proof of income is not always required, as the above loan and its costs can be repaid within the short term if the borrower can show a clear exit strategy for the loan.
Q15. Where can I apply the above kind of financing?
Bridging loans are commonly used for developing and refurbishing properties as well as being a short- term loan for purchasing properties which can be repaid through the sale of another property. It can also be applicable for clearing tax bills as well.
Q16. What are the types of assets on against which the above kind of finance be secured?
The above kind of finance is more or less secured against most common types of property– like commercial property, building plots, land and obviously residential property.
Q17. Can I acquire the above kind of financing even if I possess arrears?
The above kind of finance is lent quite leniently to all individuals who have arrears or for borrowers who have been declared bankrupt- as long as there are enough security assets within the property that is used as collateral.
Q18. Can a property that is mortgaged be kept as security for the above kind of financing?
Certainly. The above kind of finance is lent and secured against a mortgaged property on the basis of any of the first 2 charges. If additional equity is available within the property, then the above kind of finance can be secured against the property on the basis of an additional third charge well.
Q19. Are there any payments necessary beforehand?
Apart form any valuation costs that depends upon certain applications, most investors or developers do not require to typically pay any other costs up front.
Q20. Can you name the costs incurred with the above type of financing?
Firstly, application fees are charged on successful applications and vice- versa. Also, extra costs can incur on producing any valuation reports of the property. Plus, the additional costs of legality issues and the final interest payments are meant to be repaid when the term comes to an end.
Q21. Can I acquire further financing once I already receive the initial loan? Can I reduce the capital when securing the above kind of financing?
Additional funding can be lent if there is enough equity still available in the property and that the investor or developer has not defaulted the bridging loan agreement that was originally planned. Any payments made earlier can be used to reduce the cost of borrowing the above financing.
Q22. Define Closed Bridge Lending?
The above kind of finance is applicable when the investor or developer secures the above funding if the outcome or the repayment of the above financing is completely guaranteed at the end of the term. This is a less risky type of finance.
Q23. Define Open Bridge Lending?
The above kind of finance is applicable when the investor or developer secures the above funding if the outcome or the repayment of the above financing is not guaranteed at the end of the term. This is a slightly riskier type of finance and incurs a smaller interest rate.
Q24. What is the difference between a bridge loan and a mezzanine loan?
Perhaps the basic differences between both of the above types of finance (bridge loan and mezzanine) are the availability and the application as required. The latter is lent in much smaller amounts- specially to fill in any sudden gaps of funding, whereas the former is lent for a slightly longer period of time and is also lent in one single bulky payment.
Q25. Define mezzanine financing?
The mezzanine financing can be useful to literally fill in any gaps [especially any smaller gaps of funds] between the amount that is already secured from perhaps a conventional finance provider and the amount required by a property developer to finish constructing the property.
Q26. What is the difference between development finance and commercial mortgage bridge loans?
Both of the above types of financing are applicable for similar cases. The basic difference is with the term of the above types of financing. The former is instantly available to the developer or investor instantly and for typically up to 12 months. The latter is longer term and is usually lent in increments- especially for property developers who require funding at every stage of the development of the property.
Q27. How long is the term for the above source of financing?
Typical bridging loans have a duration of within 12 months. However, some loan applications can be prolonged depending upon the circumstances of the individual. The interest that is incurred within the loan term and can be repaid when the term comes to an end.
Hence, this comes to an end of answering the numerous questions regarding commercial mortgage bridge loans as well as enlightening the dos and don’ts for all readers aiming to gain knowledge about the above kind of financing.