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Understanding Open & Closed Bridging Loans

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What is a closed bridging loan?

A closed bridging loan means that the exit strategy for the loan is clear from the outset. This means the lender knows exactly how you will repay the loan at the end of the term.

An example would be an application where you are planning to refinance with a new lender to repay the loan, and you have a full offer of finance in place.

There are a number of acceptable repayment strategies for a loan to be considered closed, such as:

  • Sale of property
  • Maturity of an investment
  • Funds from an inheritance coming through

The lender will be keen to ensure the funds are definitely going to arrive, with a date already set out.

Due to the reduced risk, lenders are likely to offer lower interest rates for closed bridging finance, and may be more comfortable lending, meaning the application process is more straightforward.

What is an open bridging loan?

An open bridging loan is, as mentioned above, a term of short-term finance secured against property or land. Where it differs from a closed bridging loan is that there generally wouldn’t be a specific exit strategy in place, or the strategy has no set date.

An example of an exit strategy that would lead to an open loan is where the sale of the property will repay the loan, but the property is not yet on the market.

The key distinction is that there is no guarantee of receiving an offer, when an offer is likely to happen, or how much the offer would be. As such, this makes the transaction inherently riskier than it would be if an offer has been made, a completion date set, or even if there were already offers on the table.

While open bridging loans are slightly more flexible, they can be slightly trickier to apply for as the lender will be keen to understand how repayment will happen.

Should I take an open or closed bridging loan?

Lenders are moving more and more towards ensuring that applications are agreed with as solid an exit strategy as possible. This is done to ensure that repossessions remain as low as possible, which is obviously a goal that is shared with borrowers.

It’s one thing to look to take bridging finance where an offer has not been made on a property that is to be sold, but another to go into an application with no planned exit.

We never recommend taking a risky loan and would not offer loans where a clear exit can be put forward. Bridging loans can be costly and using them to delay an inevitable problem just reduces the equity in the property.

If you’re unsure how you can maximise the situation you’re in, you should take expert advice on the options available.

There are always numerous options on the table, some common ones that may be a better option than an open bridging loan are:-

  • Request time from your current lender while you sell the property.
  • Use the bridging loan to refurbish the property to maximise the sale price.
  • Looking at a mortgage or secured loan to raise the funds needed.

Depending on your circumstances, there will likely be other options that could work very well for you.

Bridging loans secured against your own home

These loans are called regulated bridging loans and come with stricter rules than unregulated loans.

Regulated bridging finance can’t usually be offered without a strong and realistic exit strategy in place.

This is partly due to the fact that these loans are restricted in term to 12 months, which doesn’t give sufficient time to exit the loan where there is no plan in place at the time of completion.

Open ended bridging loans

In some cases, we can offer open ended bridging loans, where the loan is unregulated.

These loans must be fully serviced (the interest paid each month), rather than rolled up and affordability checks are required to ensure that this is realistic.