Types of Bridging Finance

However, you can’t borrow funds indefinitely. Lenders will usually expect the loan to be repaid within a year, although longer repayment terms may be available – or your broker can negotiate an extension for you. 

However, it’s important to consider that open bridging loans may be more expensive due to higher interest rates. 

In some cases, lenders are less willing to provide open bridging loans because of the risk they carry. As a result of this, borrowers will need to do more to prove that they will be able to repay in the future. You’ll need to show you have an ‘exit plan’ – which is a specific plan for repaying the loan (for example, using money from a property sale).

Open Bridging Finance Example

So, when may an open bridging loan be right for you? Let’s run through a quick example. 

Let’s say your property is on the market for sale but as yet not sold, and you’re actively looking for somewhere new to buy. You spot your dream property up for sale, and it’s already had lots of interest. 

An open bridging loan can release the equity in your house for a period of time, allowing you to purchase the desired property before selling your current property and repaying the loan.

Closed Bridging Finance

A closed bridging loan is a form of finance where the borrower has a clear and credible repayment plan or exit strategy in place. This can be from either selling an existing residential property or through the mortgage agreement on a new property – anywhere where it’s guaranteed that the funds borrowed will be paid back.

In some circumstances, some people may know exactly when they will have funds available to pay off the closed bridging loan. For example, they may have a completion date for a property sale, or they may know the exact date when their mortgage will be agreed. Therefore, people in these circumstances will be suitable for closed bridging finance as they can set a fixed date for the repayments of a bridging loan.

Closed bridging loans can be cheaper than open ones, although there is less flexibility when it comes to repayment – and you may face penalties if you miss any payment deadlines. 

Closed Bridging Finance Example

Is a closed bridging loan right for you? Let’s run through another quick example of who can take advantage of this kind of finance. 

Let’s say your property has sold and exchanged contracts, but completion will not be taking place until a certain date in the future. 

At the same time, your dream property has also just been put up for sale and has had lots of interest. You don’t believe that you will complete the sale of your current property in time to purchase your dream property. 

A closed bridging loan can release some of the equity in your current property before it is sold, allowing you to purchase your dream property. The bridging loan can then be repaid when you receive the proceeds from the sale. The lender will use the completion date for your own property sale to set a repayment schedule and deadline. 

First Charge and Second Charge Bridging Loans 

Most types of bridge loans can be either ‘first charge’ or ‘second charge’. But what does this mean, and what’s the difference between them? 

The first thing to know is that a ‘charge’ is something the lender places on your property. If you can’t repay the loan, repayment will be taken from the sale of this same property and go directly to the bridging loan provider. 

First charge bridge loans are used when there are no other loans secured on the property, such as mortgages or other types of finance. In this scenario, you’ll own your property outright. 

With second charge loans, there are already one or more loans secured against the property – usually a mortgage.  The second charge bridging loan is an additional charge. If you are unable to repay the loan, the bridging loan provider will get its repayment from the sale of the property, but only after the mortgage provider and any other loan providers have received their repayments. 

As you may expect, second charge bridging finance can be more expensive than first charge loans. This is because there is more risk for the lender, as they are further down the queue for getting their money back if you’re unable to repay the loan.

Also worth considering is that in order to get a second charge bridging loan, other lenders (such as your mortgage provider) need to agree. 

Regulated Bridging Loans vs. Unregulated Bridging Loans 

Another important distinction between types of bridging loans is whether they’re regulated or unregulated. 

Regulated bridging loans are secured against a property that will be lived in by the owner, and the person taking out the loan. So if you’re buying a house to live in, you’ll want to go for regulated bridging finance. This type of loan can either be first or second charge, are regulated by the Financial Conduct Authority (FCA) and often have the same kinds of rules and terms as residential mortgages. 

If you’re a property investor, developer or landlord, you’ll be looking to get an unregulated bridging loan. This type of loan is designed for bridging a gap in finance for an investment property, rather than a home the borrower and owner will live in. 

Without the restraints and delays of regulation, an unregulated loan can provide faster access to short term finance. However, they may offer less protection and security.