If you are applying for bridging finance or are new to bridging loans, there are several words and phrases that may be unfamiliar. Here is an explanation of what these phrases mean:
Open bridging loans
An open bridging loan is a short-term loan for which there is no fixed repayment date. For example, you may need a bridging loan to purchase a new house, and then repay it when your existing house has been sold. If you do not have a completion date for when your house will be sold, you do not have a fixed date for when the proceeds of the sale of the existing house will be available. An open bridging loan enables the purchase of the new house and can be repaid at any time within the loan period. You only pay interest while the loan is outstanding.
Closed bridging loans
A closed bridging loan has a fixed repayment date. An example of when it is appropriate to take out a closed bridging loan is when you need the sale of an existing house to help purchase a new house, have a buyer for the existing house and an agreed completion date. In this case, you know exactly when funds will be available to repay the loan. The interest charged for closed bridging loans is generally cheaper than open bridging loan interest.
An asset needs to be used as security for a bridging loan. In most cases, this will be property, but commercial borrowers can use other assets such as land or equity in their business. If you fail to repay the loan, the asset could be at risk.
Loan-to-value (LTV) is the maximum loan available expressed as a percentage of the value of the property used to secure the loan. For example, if the property is worth £100,000 and you are offered a 70% LTV loan, then the maximum you can borrow is £70,000.
The exit strategy
The exit strategy is when and how the loan will be repaid. A borrower applying for bridging finance needs to show evidence that they can repay the loan within the allocated period and where the funds are coming from. An example of a straightforward exit strategy is when you are selling property to repay a loan. Provided that the property is likely to sell within the bridging loan period, this exit strategy will likely be enough for a bridging lender to agree to a loan.
Mezzanine funding is a type of bridging finance for building developers where more than one lender is involved. Typically, a bridging finance lender will provide most of the funds for a development project, with a mezzanine lender and the developer funding the rest.
If you have any other questions about what is involved in taking out a bridging loan, talk to a bridging expert at Ascot Mortgages. After you are clear about all the terms and conditions of bridging finance, Ascot Mortgages will find the best lender that matches your individual borrowing requirements, even if you are self-employed or have a poor credit record..