Open & Closed Bridging Finance
Bridging finance is a much underused form of financial help, but one that can really have some massive advantages for those looking for a short term loan, regardless of what the uses for it will be. Bridging loans can be taken out from many of the nation’s top lenders and come with a number of different interest rates and repayment lengths.
The major prerequisite to getting a bridging loan is that you must have at least some equity in the property being offered as security – normally about 20-25% is required though some 100% Bridging loans are available if you can offer an additional property as security too. In the case of a personal dwelling house, you should consider these risks very carefully before adding it to the security as it risks being repossessed if you fail to make payments.
Aside from the various questions about the lengths of different bridging finance deals and the interest payable on them, there are two other extremely pertinent questions though. The first regards the difference between open and closed bridging loans, while the other is with regards to how a bridging loan can be used. Below are the answers to both of these common questions…
What are Closed Loans and Open Loans?
The terms Open and Closed refer to the repayment options: with Open Bridging loans, there is an open-ended repayment period, therefore meaning that the borrower can decide how much they pay off and when; but with Closed Bridging loans mean there is a cut-off point that the loan has to be repaid by i.e. the Lender is aware of a defined exit date. Such a defined event is usually the sale of the property or a refinance into a cheaper form of loan e.g a Buy to Let mortgage. While neither can ever be 100% certain of occurring, the Lender takes a view based on likelihood bearing in mind their history with the Borrower.
People who are guaranteed to have money coming in on a certain date will usually go for the option of Closed Bridging loans, as they offer better interest rates and also mean that they will be out of debt as quickly as possible. Those without an income set in stone though choose open loans, as not paying off a closed loan in time can lead to heavy financial penalties being imposed by the lender.
What are Bridging Loans Commonly Used For?
Without doubt the most common use for bridging loans is within the property market, as people look to secure a property before their own home is sold. In this case, a bridging loan forms part of a solid plan to ensure that they reach a place in which they can easily afford to get the finances necessary to purchase a home. Obviously they must be careful not to over extend themselves though, as they must have the necessary equity in their current home to cover all of the repayment costs, including any interest that is charged. If they don’t they could end up with negative equity in their new home – something that is never a good idea financially!
Bridging loans are often used by businesses as well, as they look to make purchases and expand before they have the money to do so – although they must obviously be able to prove that they have the money in the pipeline. Many businesses actually rely on bridging loans for such things as purchasing stock and paying staff, mainly during quieter periods of the year.