you’re thinking about selling your old home but don’t have the funds to purchase a new one just yet, then you may be eligible for a bridging loan.
Bridging loans are defined as a short-term financial product that enables you to “bridge” the period between the sale of your old house or commercial property and the impending purchase of a new one or the refurbishment of a structure.
In many cases, taking out a bridging loan allows homeowners to move into the new property while waiting for someone to buy their old house.
Commercial bridging loans can help companies purchase a new property to expand their business, build a new structure, or refurbish existing structures that they can eventually lease out to tenants.
How do bridging loans work?
It is important to know at this point that bridging loans are usually secured against the residential or commercial property that you already own.
When preparing to apply for a loan, note that the amount of loan to value (LTV), the size of the loan compared to the property’s sale value, is usually determined by the type of property in question.
Higher LTVs only apply to loans for the purchase of a residential property. LTVs for the purchase of commercial lots or structures tend to be lower, as commercial property is deemed riskier by many bridging loan lenders.
Here’s a caveat for your own protection before you start considering your options for bridging loans. Be sure to transact only with an authorised and regulated institution such as a bank, a local lending facility with a registered office, or an international realty financing company that is registered in England.
The average interest rate for a mortgage is usually between 3 to 5% per annum. At the same time, the one for both open and closed bridging loans can go as high as 10%. You could break that down to approximately 0.75 to 1.5% monthly, and that can seriously pinch into your funds over time.
Open bridging loan overview
You need to remember that there are two types of bridging loans you can consider: open bridging loans and closed bridging loans. The difference primarily lies in the payment terms, interest rates, and costs involved for either option.
Now: what exactly do you need to know about open bridging loans? Read on.
What is an open bridging loan?
In principle, open bridging loans are loans taken out by borrowers who are unsure when their expected future funds will become available.
They know that they will sell their property; they just aren’t sure when the money will come in. In the meantime, the money they get upon approval of the bridge loan helps them move forward.
This type of bridging finance’s open-ended flexibility easily lets a borrower move into the property they’ve purchased, bring in builders for a refurbishment project, or open up a commercial property for tenants.
Open bridging loans also give borrowers more leeway when it comes to an exit plan. Nevertheless, this is no excuse for setting this and similar contingency measures aside. Indeed, potential borrowers need to have one in place even before submitting the paperwork.
How to get an open bridging loan
In the UK, you may get either an open or closed bridging loan if you are:
- 18 years of age or older. Note that you may need to check with the bank or lender agency if they have a fixed upper limit for age;
- A private individual or transacting as part or on behalf of a partnership or a limited company, particularly an entity involved in property development;
- Purchasing and/or refurbishing a private home or commercial/industrial property;
- Borrowing at least £10,000;
- A full-time employee, semi-employed, or retired with a pension; and
- Live or have a registered home or business address in the country.
What do I need to submit to get an open bridging loan?
To see if you are eligible for a loan, the lender will need the following documents from you:
- Personal information, including proof of residence in the UK and proof of employment if necessary;
- Security collateral in the form of one or more properties against which the loan can be secured;
- Relevant information and visual evidence of the property you’re planning to buy or renovate. This will include its market price as well as the price you’re willing to pay; and
- A definite exit strategy as proof that the borrower can repay the loan. This is essentially the most important document on the list as lenders need to see that you will be able to pay them back. Your exit plan may include refinancing, the future sale of a property, or expected payment for property already on the market. When submitting your exit strategy to a potential lender, describe what initiatives you are taking to ensure the sale of your old property.
What are the key advantages of open and closed bridging loans?
As stated above, an open bridging loan does not have a fixed payment term. This means that the borrower can pay back the loan as soon as the funds become available.
In which case, this type of bridging loan helps borrowers breathe a little easier: not only will this allow them more flexibility in terms of time, but it also keeps them from paying sizeable penalties if they fail to meet the terms set by their lender.
Also, lending institutions don’t usually set minimum or maximum open bridging loan sizes, enabling potential borrowers to apply for as much or as little as they need.
On the other hand, closed bridging loans are the choice of those who are confident that they will have the money to pay back the debt within a few weeks or months.
In keeping with this financial product’s short-term nature, the lending agency and borrower agree upon an exact completion date when the latter can repay the loan.
Lenders offering closed bridge loans demand that clients have a more concrete exit strategy that needs to be in place here to keep up repayments on schedule.
One other advantage: closed bridge loans also have a lower interest rate.
What should I watch out for in either an open or closed bridging loan?
Open bridge loans may have their perks, but they do come with a cost. For starters, open bridging loans are quite rare these days as lending institutions are reluctant to issue what they consider to be high-risk loans.
Whenever lenders can be prevailed upon to issue open bridging loans, they charge higher interest rates to cover any and all risks.
On the other hand, closed bridge loans share something in common with mortgages: failure to keep up repayments on a closed bridging loan will lead to penalties and additional costs. And, just as with a mortgage, there is the very real possibility that your home may be repossessed.
Likewise, there limits set on the size of most closed bridge loans, and you don’t have too many choices when it comes to the highest- and lowest-valued loan packages.
What to think about before getting an open bridging finance deal
- Do talk to a solicitor first before applying for any kind of bridge loan. They can guide you through the potential benefits and liabilities of such a loan and offer legal advice relevant to your decision.
- Do shop around for the best possible deals before making a decision. LTVs and interest rates differ from one lender to another. Therefore, it’s best to consider all your available options before signing up. Also, be sure to read the fine print first. See if the lending agency charges service and processing fees over and above the actual loan amount.
- Do your own research. Educate yourself regarding how bridging finance works – and how it can work for or against you. Weigh the pros and cons of either open or closed bridging finance products to see which one suits your needs best.
- Don’t go in there without a proper exit plan. We cannot emphasise this enough, especially if you’re going in for a closed bridging loan. Give your lender a clear idea of how you’re going to repay the loan. Be sure to have a contingency measure in place in case anything goes south.
- Don’t sign anything until you’ve properly gone through the terms and conditions of the contract. Again, check with your solicitor and see any clauses, stipulations, or fees that should be clarified before you sign.
Open bridging finance loan conclusion
So now you have all of the information you need on open bridging finance and how it works. If you would like to get some advice on your requirements, please call us now on 0808 301 9509 or contact us here.
If you would like to use our bridging loan calculator this will help you with some figures based on personal and commercial open bridge loans.