There are two basic types of bridging loan, how and when you intend to repay the loan will determine which type 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, the exact timing of the repayment cannot yet be determined.
Here we will provide an overview of Open Bridging Loans.
What is a Bridging Loan?
A bridging loan is secured short term finance allowing companies or individuals to borrow money for almost any purpose.
The most common use is for purchasing a property. Bridging loans can be set up fast, so they are used by investors and developers to snap up property without the usual timeframes and red tape associated with a long term mortgage. Bridging loans can normally be setup in just a few weeks and the lenders are experienced in dealing with challenging deadlines.
Bridging loans are also helpful to prevent property chains from breaking.
They are a very flexible way of borrowing money and properties don’t even need to be in a habitable condition. So you can borrow 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.
So what is an Open Bridging Loan?
A bridging loan will be classed as ‘Open’ when the timeframe for repayment is not yet certain. This means that the final loan repayment can be made at any point up to the end of the loan period, which could be from a few weeks to 2-3 years.
This extra flexibility when compared to a Closed Bridging Loan means that the interest rates are a little higher as the lender is exposed to a greater risk.
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.
Loan Repayment
When applying for any type of bridging loan the lender will want to know details about your exit strategy. This will be how you intend to repay their loan and it is an important aspect of your application.
You could have one of 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
The Differences Between Open and Closed
Here are some of the main differences between these types of bridging loan:
INTEREST RATES
Open bridging loans are more expensive than closed. The lender is exposed to a higher level of risk due to the repayment uncertainty and so a higher 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 find. 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.
QUICK TURNAROUND
Bridging loans can be arranged quickly. Often in just a week or two.
BORROW MORE
As bridging loans are secured against your property larger amounts can be borrowed when compared to unsecured loans.
FLEXIBLE TERMS
Loans can be arranged without proof of income and with some bad credit.
Regulated and Non-Regulated Bridging Loans
Regardless of whether they are open or closed a bridging loan may 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 a regulated bridging loan. An 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.
Uses for an Open 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.