Open Bridging Loan

Why is open bridging more expensive than closed bridging?

It all comes down to risk. Lenders don’t like it, so the more risky something is for them, the higher the cost.

If they have certainty – that legal contracts are signed and money will be changing hands in six, eight or ten weeks, they will be more confident about lending you some money. They will get it back in ten weeks, so the risk is a lot less, and they’ll price accordingly.

If you have a house to sell but you don’t know if it will take 12 or 18 months, or how much you will get for it, there’s more risk for a lender. They don’t know exactly when they’re going to get their money back, and that’s a worry to them. They therefore price it higher.

Can I still get an open bridging loan if I have bad credit?

Yes, because the bridge is normally secured against an asset of some type. A lender will still look at your credit, but they’re more focused on whether the transaction could have an issue.

If your exit strategy is to refinance, that’s where bad credit could have an impact. You might be able to get the bridging loan, but can you get the finance to exit that bridge?

That’s what we need to think about in that situation. What’s the likelihood of you being able to get a normal mortgage to repay the bridge?

How do I get an open bridging loan? What’s the process?

Come and talk to us. We’ll have a conversation to find out what you’re trying to do, your plan and goals. We’ll pull that picture together, get an understanding of all your numbers and talk to you about your options.

Then we’ll start talking to some bridging finance companies, telling them your story and pitching what the deal looks like. They’ll come to us with prices, and if you’re happy, we help you move forward.

There’ll be fees to pay to lock things in: valuation fees, lender fees and broker fees. A valuer will go out and assess the property, and it will go for underwriting at the same time.

If it all goes to plan, you’ll get your offer, the legals will happen, and you can draw down the money a couple of weeks later. It can all be done relatively quickly. But the more complex a deal is, the more time it could take.

What are the pros and cons of an open bridging loan?

The key thing is that it gives more flexibility. You’re not committed to a date other than maybe 12 months or two years down the line – so there’s less pressure on you.

However, you still have to pay the loan back at the end of that period. But you’re paying for that flexibility. There will be higher interest rates and the fees are more.

It can save a whole property chain from collapsing. Perhaps a buyer has pulled out, which could threaten five or six more properties going through. An open bridge could prevent that from happening, for the right cost.

The interest is usually rolled up, so you don’t necessarily make monthly payments towards it. It can be rolled up into the final payment. That’s assessed as part of the deal, but we tend to see that more often with open bridging deals than closed bridging deals.

We’ve already talked about costs being higher, but with an open bridge, you may not be able to borrow as much as with a closed bridge. Because of the uncertainty and risks, lenders tend to be more cautious.

One other thing we sometimes see is that the lack of a robust deadline can lead people to become a bit too relaxed – they don’t worry so much about paying it back. You should be focused on that because, in the end, that money needs to be paid back to the lender, and you need to be ready to do it.

You’ve demonstrated throughout this episode how a broker can help. Anything else you’d like to add? Any final thoughts?

It’s just worth considering that a lot of companies do bridging finance. There are a lot of lenders out there – but not all of them are open to the public. You have to go through an intermediary or a broker. Remember that, especially if you want to get a particularly complex deal done.

You also need to think about your exit early on, so you know what that looks like. You need to stress test it, too and make sure it’s realistic. For example, with bad credit, will you get a refinance?

We know what lenders like. If you come to us with a complete redevelopment plan and want bridging finance, that might not actually be the best route for you. We talk to you about your plan and what’s realistic. We help you look at the total costs, not just the headline rates, to help you consider the full cost before you go down this route.

Key Takeaways:

• An open bridging loan is a short-term loan that offers flexibility by not having a fixed repayment date, though there is typically an overall limit of 12 or 24 months. This is in contrast to a closed bridging loan, which has a fixed legal completion date for repayment.
• Open bridging loans carry more risk for lenders due to the lack of a fixed end date. This increased uncertainty is reflected in higher pricing, costs, and interest rates compared to a closed bridge.
• Lenders are primarily concerned with how the loan will be repaid (the “exit strategy”). The more certain and robust the exit plan is, the better the deal you are likely to secure.
• These loans are typically used in situations where the timing of an exit is uncertain, such as when a buyer pulls out of a chain (a “broken chain”), for auction purchases, for financing renovations/conversion work, or when waiting for an inheritance that does not yet have a fixed payout date.
• Open bridging loans provide more flexibility and can prevent a property chain from collapsing. The interest is usually rolled up and paid in the final payment, but due to the risks, lenders may be more cautious about how much you can borrow.

YOUR HOME IS AT RISK IF YOU FAIL TO KEEP UP PAYMENTS ON YOUR MORTGAGE OR ANY OTHER LOANS SECURED AGAINST IT.