There are two basic types of bridging loan, how and when you intend to repay the loan will determine which one the lender can offer.
- Closed Bridging Loan – Where you know exactly when and how you will repay the loan.
- Open Bridging Loan – Where you may know the how but the exact timing of the repayment cannot yet be determined.
Here we will provide a summary of Closed Bridging Loans.
What is a Bridging Loan?
A bridging loan is a type of short term finance which is always secured against a property. It allows companies or individuals to quickly and conveniently access money for almost any purpose.
The length of the loan is set at outset and is between 3 months – 3 years depending on the lender.
As the name suggests, the loan is intended to bridge a funding gap until alternative money become available.
They are most commonly used for purchasing a property. Bridging loans can be set up very quickly, so they are used by property investors and developers to snap up deals without the normal red tape associated with a long term mortgage.
Bridging loans can usually be arranged in just a few weeks and these lenders are used to dealing with challenging deadlines.
Bridging loans are commonly used to prevent property chains from breaking.
Lending terms are quite flexible with no proof of income needed and properties don’t even need to be in a habitable condition. Many types of poor or bad credit will be ignored. So it’s possible to purchase a run down property and pay the loan back on sale or when you remortgage.
To learn more read our Introduction to Bridging Loans.
What is a Closed Bridging Loan?
A bridging loan will be classed as ‘Closed’ when there is a fixed date for full repayment of the loan.
When you apply the lender will ask about your exit strategy and timeframe. This is where the money will come from and when. For some people it is possible to know exactly when the money will arrive. This could be because of an agreed completion date on a property sale or the maturity of an investment.
When a definite date for repayment is agreed then the loan will be a closed bridging loan.
Your loan would be set up on an interest only basis, as is common with most types of bridging finance.
Generally the maximum possible loan will be 75% loan to value (LTV) of the current value. This means that finance can be arranged for almost any property type or condition including run down and uninhabitable properties.
Closed loans will have more competitive interest rates compared to open bridging loans, and this reflects the lenders reduced risk.
Bridging Loan Repayment
When applying for any type of bridging loan the lender will always want to know details about your exit strategy. This will be how you will repay their loan and it is an important aspect of your application.
There are three main exit strategies:
- Property sale – Either the property used as security or another that you may own.
- Refinance – Using longer term mortgage finance to repay the bridge.
- Additional cash – Perhaps a maturing investment or inheritance.
You will be required to settle the original capital borrowed plus any outstanding or accrued interest. If fees were also added to the loan this will increase the amount outstanding.
The Differences Between Open and Closed
Here are some of the main differences between these types of bridging loan:
INTEREST RATES
Closed bridging loans are less expensive than open. The lender is exposed to a reduced level of risk and so a lower interest rate will be charged.
PENALTY FEES
If you miss the deadline for repayment of a closed bridging loan then the lender will most likely levy additional fees as a penalty.
EXIT STRATEGY
A bridging loan lender needs a firm and specific date for the loan exit before the loan will be classed as closed. For example a near future completion date or maturity date of an investment. Otherwise, the loan will be determined as open.
In either case the exit strategy, the how, is still extremely important for the lender.
CHOICE
While closed bridging loans are deemed slightly less risky than the open alternative they are harder to qualify for. This is often due to a lenders interpretation of the exit date when your repayment funds are available.
This date needs to be specific, precise and provable.
Regulated and Non-Regulated Bridging Loans
Regardless of whether they are open or closed a bridging loan may also fall within the FCA definition of a regulated loan.
If you are buying a property to live in, or for a close family member, then this would be classed as a regulated bridging loan. A pure investment property purchase would be an example of a non-regulated bridging loan.
Due to the extra rules and regulations there are less choices of lenders that offer regulated bridging loans. Your bridging loan broker will make sure that the correct lender is used.
Should I choose an open or closed bridging loan?
The answer to this question lies with your exit strategy.
Does your exit strategy includes a fixed and specific date where full repayment of the loan is possible?
If yes, then this should be a closed bridging loan and will be granted for a specific amount of time. Examples would be:
- contracts have been exchanged for a property sale and a completion date agreed
- a maturing investment with funds due on a specific date
Closed loans offer better interest rates and so will be cheaper.
If you cannot provide a specific date, or are uncertain about the date, then choosing an open bridging loan removes the pressure of repayment. You do obviously have to repay it but the timeframe can be more flexible.
An example could be the purchase of a run down property at auction. You will need time to refurbish it and then market it for sale. While this could be done quickly, you do not have a guaranteed date for the lender to work to.
Uses for a Closed Bridging Loan
Bridging loans are well know for being incredibly flexible, with funds available for almost any purpose.
Here are some commons uses:
- Secure a new property outside of a property chain
- Purchase a buy to let quickly
- Buy a property at auction
- Purchase a property that is uninhabitable
Do I need to use a broker?
There are a lot of specialist bridging lenders that are not well known names and do not seek to deal with borrowers direct. These lenders often offer the best terms.
By using a bridging loan broker you will have the widest possible choice of lenders and products.
Bridging loans are a specialist type of loan and so by having an experienced broker looking after you will enable you to get the right type of loan with the right lender. Brokers can also negotiate to keep the fees and interest rates as low as possible.