Bridging finance can be ideal for developers, landlords and even house hunters who find themselves faced with an incoming debt before a mainline of credit is available. These short-term loans typically come with high interest rates, but they can be flexible and are usually much quicker to arrange than alternative forms of borrowing.
You may have heard the terms ‘open bridging loan’ and ‘closed bridging loan’ bandied about and are wondering how they differ and which one you should go for.
This article has you covered, so read on to find out more about these two variations of bridging finance.
Open vs closed bridging loans: What’s the difference?
To put it in plain English, the main difference between open and closed bridge finance is that closed loans have a fixed repayment date. Both are offered on a short-term, interest only basis, but with closed the exit strategy is more clearly defined.
With open ended bridging loans, the lender may still ask you to outline your exit strategy, as this is of great important in any bridging deal, but the strategy may have no fixed date.
Why choose closed bridging finance?
A closed bridging loan is the way to go if you know exactly when your exit strategy is due to pay out. In most cases, the exit will either be the sale of a property or a remortgage.
If you have a buyer lined up for the property you’re planning to develop with the funds, or a lender willing to offer you a mortgage based on your plans, you should have a clear idea of when you’d be able to settle the loan amount, in which case, closed bridging is for you.
When to opt for open bridging finance
Open bridging loans are more risky for the lender and therefore harder to come by, but finding one may be in your best interest if there’s any uncertainty around the exit strategy. Perhaps it’s a complex development project with an unclear completion date, or you have a sellable property that will raise the required amount, but no firm offers on the table.
Are closed bridging loan rates any different to open?
Yes, the interest rates are usually more favourable for closed bridging finance. Open bridging loans, by definition, are open-ended with more leeway around the exit strategy, so the risk the lender is taking on is higher.
With this in mind, closed bridging loans are usually offered at a lower interest rate and the provider is more likely to be flexible when it comes to eligibility.
Getting the best rates on open and closed bridging loans
Whether you’re seeking an open or a closed bridge loan, getting the best rates comes down to convincing the lender you’re a low-risk borrower. This is always determined on a case-by-case basis, but most providers reserve the best rates for applicants with the following…
A strong exit strategy:
The more likely your exit strategy is to pay off, the better. The lender will look at factor such as how sellable (or mortgageable) the property is, how achievable your plans are and whether any delays/setbacks are likely. Open bridging deals usually mean the exit is uncertain, which is why the rates are often higher.
Clean credit: Bad credit will usually only be an issue if the lender feels it will put the exit strategy in jeopardy. This might be the case if the exit is a remortgage and you can expect underwriters to be mindful of the possibility of further adverse building up during the loan term. With credit issues against your name, you will need to convince the lender that they won’t impact on you settling up at the end of term, but if your credit rating is clean, things are obviously more straightforward.
Experience in property:
It will be easier to convince some lenders that you’re capable of achieving your plans if you have experience in property development/investment. Some providers may even insist on this if it’s a complex project and might request evidence of past projects. That isn’t to say getting a bridge loan with no experience is impossible, but a strong track record usually helps.
A healthy deposit:
Most bridging lenders impose a strict cap on LTV and won’t offer loans with more than 70-75%. This means a minimum deposit of 25% is needed, but superior rates will kick in if you can put down more than that. Bridge loans with higher LTV (up to 100%) are usually only available if you’re able to secure the loan against multiple properties/assets you already own.
How long are the terms for open and closed bridging loans?
The majority of bridging lenders prefer to keep things very short-term, whether the loan is open or closed - a term of 12 months or less is standard. Some providers will go higher than this, depending on the specifics surrounding the project, but the maximum term you’re likely to find even with whole-of-market access is 36 months.
Whether longer terms come with greater risk is subjective. If your exit strategy is the sale of a property, for instance, this gives you more time to offload the property. But keep in mind that the longer the term, the more you will end up paying back due to monthly interest.
Regulated vs. unregulated bridging loans
As well as deciding whether to go for an open or closed bridge loan, you will also need to establish if regulated or unregulated bridging finance is the way to go.
This will be an easy decision, as a regulated loan is your only choice if the funds are for a property you already live in or are planning to live in. They’re regulated by the Financial Services Authority (FSA), which means borrowers are have extra protection against mis-selling and bad advice.
Unregulated bridging loans, meanwhile, are strictly aimed at commercial borrowers. They can be tailored to the applicant’s needs and are exclusively offered by lenders who can provide bespoke advice about commercial borrowing. In fact, most bridging lenders are unregulated so it’s important to seek whole-of-market advice if you’re after a regulated bridging loan, to make sure you find the provider offering the best rates for you.
Get in touch and the experts we work with will connect you to the right lender.
Are there open and closed bridge to let deals?
It is indeed possible to find both open and closed bridging loans for buy to let properties. These are known as bridge to let applications, and some lenders will be able to handle both the bridge loan and the BTL mortgage simultaneously. They will usually offer you an agreement in principle on the mortgage when the funds are due to be released.
Maximum LTV is usually 75% and the BTL aspect of the deal will still need to meet the lender’s standard criteria for this product type, including a valuation.
Are there open and closed bridge loans for limited companies?
Both open and closed bridging finance is available to Ltd company borrowers. As with any type of customers, the lending decision will hinge almost entirely on the strength of the exit strategy, and the rates you’ll receive are likely to be no different.
It will boost your eligibility and give you access to a wider range of lenders if your Ltd company is a Special Purpose Vehicle (SPV) but this is by no means essential.
The way the lender handles the deal will likely be similar to how they would process a Ltd company BTL deal, so they may ask for personal guarantees from the company directors.
Can I get an open or closed bridging loan with no income?
It’s theoretically possible to get either, as all bridge loan applications are assessed on a case-by-case basis. If your plan is to renovate and sell a property, the funds to settle the loan will come from the sale, but the lender will likely be keen to know how you plan to finance the works with no income.
Most regulated bridge lenders will want you to have some form of income if the exit strategy is to remortgage onto a residential agreement, though there are exceptions.
For instance, if the borrower is downsizing and there is sufficient equity in the property they’re selling to cover the purchase of the new property, most open and closed bridging lenders will be happy to offer you deal regardless of your lack of income.
Speak to an expert in open and closed bridging finance
For further information about finding a bridging finance broker and get the ball rolling on your application for one, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t change a fee and there’s no obligation or marks on your credit rating.
*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA.Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
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