Whereas a closed bridging loan has a fixed repayment date, an open bridging loan does not, and this often leads people to ask questions about how they work and what they might be used for.
The exit strategy
All bridging loan borrowers need to have an exit strategy, which is a plan for when and how the loan will be repaid. A typical use for a bridging loan is to complete the purchase of a house before an existing house has been sold. The funds from the sale of the existing house are needed to purchase the new home. Even if a mortgage has been arranged for the new home, the proceeds of the existing home may still be required to fund a portion of the purchase price.
If there is a buyer for the existing house and the completion date is known, a closed bridging loan is likely to be the more appropriate option, as the borrower knows the exact date that funds will be available from the sale of their existing house to repay the bridging loan.
However, buying a property is not always that straightforward. Often, there is either no known buyer for the existing house, or a specific completion date has not yet been confirmed with the buyer. In this case, an open bridging loan provides the flexibility of being able to be repaid at no specific date.
If a buyer has not yet been found for an existing property, and the sale of the property is a crucial factor in buying a new one, the borrower needs to be certain that the property will sell before the end of the open bridging loan period. The property must be within an area and of the type that is in high demand so that there is an expectation that a buyer will be found within a reasonable time period.
Open bridging loans are more flexible than closed bridging loans and are especially useful if delays occur during a property deal.
The length of an open bridging loan
Although open bridging loans do not have fixed repayment dates, they are not long-term loans. Repayment is normally required within 12 months.
Unlike with a mortgage, there are usually no exit fees, so repaying the open bridging loan early means that less interest will be charged.
An open bridging loan will generally be at a higher interest rate than a closed bridging loan. This may tempt some borrowers to seek a closed bridging loan, but such an application will be turned down if there is no certainty about funds being available on the repayment date.
Usually, interest is not due to be paid until the time of repayment. Borrowers will also be charged arrangement and legal fees.
Uses for open bridging loans
There are several uses for bridging loans apart from financing a house purchase before an existing house has been sold. Property bought at auctions needs to be paid for 28 days after the auction. A mortgage can often take longer than this arrange, so an open bridging loan can be used to pay for the property, then repaid once mortgage funds are available.
Many mortgage lenders will not provide mortgages for property that is not fit to live in. An open bridging loan can be used to finance the refurbishment work so that it is suitable for a standard mortgage. The owner may have a completion date from the builder, but it is not wise to apply for a closed bridging loan as contractor’s completion dates can be unreliable, making the repayment date uncertain.
A lender will require security for the loan, which will normally be property. If the borrower cannot repay the open bridging loan, their property will be at risk.
For businesses, some lenders will accept other forms of security, including equipment, the value of invoices due or equity in the company.
Who can apply for an open bridging loan?
An open bridging loan can be applied for by individuals or businesses. An individual could be a person who intends to live in the property or a landlord using a bridging loan for buy-to-let property. Developers often use bridging loans to refurbish homes they intend to sell at a profit.
A business can apply for an open bridging loan for non-property purposes such as purchasing stock or equipment, or to provide short-term finance for temporary cash flow shortages.
The application process
The first stage of the bridging finance application process is to discuss your borrowing needs with Ascot Mortgages. We have relationships with a large number of lenders and can match your individual requirements with the most suitable ones. You will normally be given a decision in principle about your application within a day.
After signing an application form and proving your identity, you will need the property used as security for the loan to be valued, usually by a valuer who will submit a report. After this, you will receive a formal loan offer letter and a legal pack that needs to be sent to your solicitor to action.
Other documentation may be required, such as proof of your earnings and your exit strategy. Once the valuation is completed, and documents checked, the money is then transferred into your solicitor’s account. It can then be forwarded to pay for the completion of a house purchase, or deposited in your company’s bank if being used for business purposes.
Open bridging loans, though more expensive than closed bridging loans, are a useful tool for raising short-term money, They are very popular too, with £150 million lent by bridging finance companies in the second quarter of 2017.
If a bridging loan feels like the solution to your borrowing needs, then start the borrowing process with a free, no obligation discussion with Ascot Mortgages. We are expert bridging finance brokers and provide unbiased advice to our clients, helping us to find the best open bridging loan deal according to your individual needs.