There are two main types of bridging finance – open and closed. In this article, we’re going to look at how closed bridging finance works.
An open bridging loan has no fixed repayment date, but it is a short-term loan for a period of up to two years. Repayment is expected before the loan period expires.
What is closed bridging finance?
Closed bridging finance has a fixed repayment date. A typical reason for a closed bridging loan is to raise funds to complete the purchase of a new home before the borrower’s existing home has been sold. If there is a buyer for the existing home, and the completion date is known, then the borrower knows the date when funds will be available from the sale of the home to repay the bridging loan. In this case, a closed bridging loan could be a better option than an open one.
Closed bridging loans are short-term loans and the fixed repayment date will usually be less than 12 months after funds are available.
The advantage of a closed bridging loan
The main advantage of a closed bridging loan is a lower interest rate when compared with an open bridging loan. This is because the lender has more certainty about the fact that the loan will be repaid. A closed bridging loan is regarded as low risk and this is why a low interest rate is applied. With an open bridging loan, interest is added until the loan is repaid. The total interest paid is unknown when the open bridging loan is taken out if the borrower does not have a fixed repayment date.
With a closed bridging loan, the borrower knows exactly how much the loan will cost in interest payments and fees. Individuals, limited companies and partnerships can apply for loans.
The rate of approval for closed bridging loans is higher than for open bridging loans.
Interest and fees
Unlike a standard mortgage, there is no fixed interest rate for bridging finance. Each loan application is studied by a risk assessor, who fixes the interest rate depending on how high a risk the assessor applies to the loan. Interest is usually not paid each month, but when the loan is repaid at the date fixed for the end of the closed bridging loan. There are normally no penalty charges for early repayments.
Borrowers should expect to be charged an arrangement fee for the loan. There are also legal and valuation fees to pay. Most lenders that charge an arrangement fee will not apply the fee if the loan offer is not taken up.
What can closed bridging loans be used for?
Closed bridging finance can be used to complete the purchase of a property. They can enable the completion process to be done quickly while waiting for the sale of existing property to be completed.
When purchasing property at auctions, buyers are normally expected to pay the full amount of winning bids within 28 days of the auction, but a standard mortgage can take longer than 28 days to arrange. If the buyer knows when their mortgage funds will be available, a closed bridging loan can be used to pay the purchase price of the property, then repaid on the date when mortgage funds are ready.
Business can use bridging finance to tide them through temporary periods of cash flow. Many businesses that are affected by seasonal factors use bridging loans to finance the business during the low season.
Businesses can also use bridging finance to purchase stock and equipment. It is even possible to obtain a loan to pay an overdue tax bill.
A decision in principle to accept a loan can be made in less than 48 hours, with the money available between two and four weeks later.
Security, usually in the form of property, is required to secure a bridging loan. For businesses, equipment and equity in the business can be considered as alternative forms of security.
If you already have a loan secured against property, it may still be possible to use it as security provided there is enough equity left in the property. A large loan based on the value of two properties can sometimes be arranged. If the loan cannot be repaid, property used as security is liable to be repossessed.
Lenders are more concerned about the value of the asset used as security than lending to someone with a low credit score. This is because they know that the assets can be sold to repay the loan.
How much can be borrowed?
Bridging loans are available from around £50,000. In theory, there is no upper limit, but the total loan value will depend on the value of the property used as security.
Most lenders will provide a loan worth up to 70% of the value of the property, but it is possible to borrow more, though extra security may be required.
What happens if the borrower cannot pay back the loan on the exit date?
When accepting a closed bridging loan application, the lender needs to be confident that the borrower can repay the loan on the repayment date. Not everything always goes according to plan, so it is possible that the expected funds to repay the loan are delayed.
As soon as the borrower knows there will be a delay, they should contact the lender. Lenders will work with the borrower to look at a revised repayment date. The borrower will have to pay the extra interest payments and extra fees may be charged.
Ideally, the repayment date that is agreed when the loan is set up should be a few days or weeks after the expected funds are available in case of delays.
How to apply for a closed bridging loan
For further information, and to apply for a closed bridging loan, talk to an advisor at Ascot Mortgages. We have access to a wide number of bridging finance lenders and match each individual borrower’s requirements with the best bridging loan deal.