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Closed Bridging Loan
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Rohit Kohli
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What is a closed bridging loan? Is it hard to get a closed bridging loan?
It’s a short-term loan that has a fixed repayment date. Usually, you take this kind of loan when you know you can pay it off by a specific deadline, because you have a plan in place.You’re looking for finance to cover a shortfall, or a delay in getting permanent finance sorted out. It’s easier to get a closed bridging loan than an open one, because there’s more confidence you’ll be able to repay it. We see these more often than an open bridging loan.
What are the key differences between open and closed bridging finance?
Whilst both are short-term lending, with open finance you don’t have a specific end date. Perhaps you’re doing a project that you think will take about 12 months, but you’re not sure.You need to give yourself some wiggle room and not set an end date. On a closed bridging loan, you might have a project to do, but the work involved is fairly light. There’s no major reconstruction and it’s only going to take around six weeks. At that point, you’ll be able to refinance it – or you already have a refinancing offer. You can then get finance based on a closed option.
What is the difference between an open and a closed threshold?
Usually that refers to the Loan to Value (LTV). That’s how much lenders are willing to lend you based on the value of the property as it stands at the moment.Closed bridges may allow slightly higher lending thresholds because there’s more certainty of the money being repaid. They know how much money will come back to repay that loan.With open bridging, there may be less funding available for your project, and a lower Loan to Value ratio.
What is the difference between closed and open schemes?
With closed schemes, the exit is guaranteed. This might be used where contracts have already been exchanged on a property, but there’s a longer delay before you can complete. We know that the sale is going through, but it might be two or three months away for whatever reason. You might take out bridge finance to complete a purchase whilst you wait for your own property sale to complete. That’s how a closed scheme will work.On an open scheme, the product’s a little more speculative. Perhaps you’ve bought a property that needs a lot of renovation work. Maybe you need to put a new kitchen and bathroom in, and new plumbing. You don’t know when you will be able to sell it or what the final price will be.It’s an open scheme because you don’t have an end date and there’s no buyer in place. You might not know who you’re actually going to sell it to or how you’re going to refinance it.
Why is it important to have an exit strategy?
You have to remember that bridging is short-term finance. It’s not a long-term solution to any funding issues. It is just to bridge a gap between point A and point B.The exit strategy is how you will come out of that finance agreement. You need to know how you’ll do that because if you can’t exit, the impact is expensive. There will be penalties to pay and higher interest which can roll up very quickly. That could erode all the equity you have in the property quite quickly. Having an exit strategy is really important. Whether you’re going for a closed or open bridge, you need to know how you’re going to repay it.Lenders aren’t going to approve a bridge without a viable exit. If you don’t have a plan in place, whether it’s open or closed, they’re less likely to lend to you or might give you less than you need.Having an exit ready gives you a direction of travel and will stop you worrying at night about how you’re going to actually come out of the bridge.
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What can a closed bridging loan be used for?
We talked earlier about breaking a property chain – to complete a purchase when your sale hasn’t completed yet. There’s a buyer in place already and it’s moving through the process.We do see this often when someone’s downsizing or upsizing. They may be moving to a smaller property, but they haven’t sold their home yet. They take out bridging finance to buy the property and when their house sells or completes, they pay it back. We also see closed bridging in probate, where a property in someone’s estate hasn’t cleared through yet, but there is a finance requirement. Bridge finance can be taken at that point.The one everyone knows is auction purchases. You buy a property at auction and you will refinance it – you may already have those plans in place. You just need this finance to bridge that gap between today and completion of a standard mortgage.
Should I choose an open or closed bridging loan? How do I know which one is right for me?
You would choose a closed bridge if you know how you’re going to repay it and when. You have those dates locked in. An open bridging loan would apply where you have a plan to repay it, but you haven’t got that locked in at the moment. If you’re unsure, speak to someone like us for advice.
Can I still get a closed bridging loan if I have bad credit?
Yes, because bridging is asset-backed lending. It’s not necessarily focused on your credit history – it’s more about the value of the property the lender will put a charge on, and the risk they perceive around it.However, lenders will want to look at your credit history and credit score as part of assessing that risk.With bridging finance, it’s not always a fixed interest rate. Lenders may adjust the rate based on the risk. If you’ve had bad credit in the past, a higher interest rate could be involved. You can get bridging finance with bad credit, but it’s not always straightforward and you may end up paying a little bit more.
How do I get a closed bridging loan? What is the process here?
Speak to a broker who deals in this side of things and can assess your requirements and your exit strategy. That’s the first step. We then get some indicative terms from lenders to give you an idea of what you can borrow and the costs. If you’re happy with those terms, we make a full application, at which point the lender does due diligence checks and will value the property. It then moves into the legal work where a solicitor arranges a legal charge over the property.It can all happen fairly quickly if required. If you need it very fast, you might end up paying higher fees to get that money sooner. Generally, though, it’s weeks rather than months.
What are the pros and cons of a closed bridging loan?
A closed loan is usually cheaper than an open loan because of the lower risk involved and better certainty for the lender. You may even be able to borrow a little more.The cons are that it is inflexible. Once you’ve agreed a date and locked it in, missing that deadline will lead to heavy penalties and much higher interest rates. That could erode the equity in the property very quickly. If you’re going down the closed route, your exit strategy does need to be rock solid.You also need to think about the costs involved. The interest charges can sometimes be rolled into the loan itself and you pay it all at the end. Sometimes lenders charge exit fees if you’re repaying the loan much earlier than anticipated.
You’ve demonstrated throughout this episode how a broker can help. Is there anything else to add?
Bridging finance can be quite complex and there are lots of options. Speaking to someone with access to lenders across the marketplace will give you more choice, and we’ll help you find a deal that meets your circumstances. It’s good to speak to someone with bridging experience – because that exit can be stressful. We talk to you about that exit, how robust it is and how likely you are to achieve it, giving you more confidence in your ability to repay that loan.
Key Takeaways:
- A closed bridging loan is a short-term financing option with a fixed repayment date that is secured because you have a clear plan in place to repay it by a specific deadline.
- It is generally easier to get than an open bridging loan, and lenders may allow slightly higher lending thresholds (Loan to Value) due to the greater certainty of repayment.
- An exit strategy – how you plan to repay the loan – is essential, as bridging is only short-term finance, and lenders will not approve a loan without a viable plan.
- Common uses for closed bridging loans include completing a purchase to break a property chain, financing auction purchases where refinancing is planned, and managing finance requirements during probate.
- Closed loans are typically cheaper than open loans because of the lower risk, but they are inflexible, and missing the locked-in repayment date will lead to heavy penalties and high interest rates.
YOUR HOME IS AT RISK IF YOU FAIL TO KEEP UP PAYMENTS ON YOUR MORTGAGE OR ANY OTHER LOANS SECURED AGAINST IT.