Closed Bridging Loan Guide – What is a Closed Bridging Loan?
Are you looking for quick financing to resolve cash flow issues? Similarly, are you also expecting sales proceeds from an existing property? Then a bridge loan can close that gap.
It’s become a go-to solution for many, even in property development. With property, bridge loans enable potential homeowners to make a downpayment on the new property while waiting for the property sale of the old one.
Any individual or business can avail of such loans to meet urgent obligations. Generally, you have two options: go for a closed bridging loan or an open bridging loan.
Which suits your needs – open bridging loans or closed bridging loans? In this guide, we’ll walk you through what closed bridging loans are and whether they’re a better fit for your bridge loan requirements.
What Is A Closed Bridging Loan?
A closed bridging loan is a short term financing option where the loan’s exit strategy is explicit in the application process. Compared to the other type of bridging finance, open bridging loans, as the name implies, the repayment terms are open.
While open loans provide a greater degree of flexibility, closed loans have an advantage. With a closed bridge loan, in other words, you, as the borrower, have a clear plan in place for the repayment of your obligation.
From the lender’s perspective, they know how and when you will repay the bridge loan when its term ends. As a result, closed loans tend to be preferred by lenders over open loans. They are really popular for purchasing properties at auctions, which is commonly known as auction finance in the bridging world.
When Do You Use A Bridging Loan?
Bridging loans, whether open or closed bridge loans, can be used for several legal purposes. These are the most common:
- Secure a new property while waiting for the sale of the current property
- Purchase a property in auction quickly
- Keep purchasing despite a break in the property chain
- Pay for development, renovation, or refurbishment loans before switching over to a mortgage
- Keep business operations running while searching for a new owner/investor for a distressed business
What Is A Bridging Finance Exit Strategy?
To understand what an exit strategy is, here’s some context. You need additional funds to secure the mortgage approval for a new home. What you can do is use a closed loan to remedy the gap – finance the initial purchase, which you can then change to a mortgage once you get approval.
To ensure that the approval process comes through without delay, you need to put together a viable and reasonable exit strategy. Doing so will save you a world of pain and inconvenience.
To illustrate, the lender usually lays down some guidelines on an exit strategy:
- Is there a definite plan to repay the loan?
- Is this plan’s timeframe clear and achievable?
- What potential barriers, if any, would prevent the realisation of the plan?
Should I Choose An Open Or Closed Bridging Loan?
We’re often asked which is the better financing option – open or closed loans?
Right off the bat, closed bridge loans have more friendly interest rates and a higher likelihood of approval than open bridging loans. Therefore, if you want a less burdensome and easier short term finance option, opt for a closed loan instead of the open one. You should still compare bridging loans to ensure you get the best rates.
Remember that by their nature, bridging loans are not long term solutions. Thus, they usually come with higher rates and shorter repayment terms (12 months maximum).
While open and closed bridging loans are secured against high-value assets like land or property, closed bridge finance inspires more lender confidence since they know exactly how you’re planning to repay the lump sum.
On the other hand, open bridging loans incur higher interest rates. While not being required to delineate an exit strategy at the outset may be more convenient, you’re still expected to declare how you will go about repayment.
Understand that an open loan is different from a conventional mortgage because you’re not going to make monthly payments until the loan is closed. This is the same if you are looking for overseas bridging loans in most countries.
What Are Some Examples Of Strong Exit Strategies For A Closed Bridging Loan?
If you’re considering taking out a closed bridging loan, be prepared to articulate a strong exit route. Having that on the ready will speed the approval process along.
We’ve compiled some strong exit strategies below:
- Cash redemption
- Renovation and resale
It’s important to determine which exit route is the most doable for you and your circumstances.
If you’re anticipating a cash event within a specific period, such as a pension lump sum, when an investment matures, inheritance funds, or a liquidity event that cashes out ownership shares, you can specify this as an exit plan.
This is the most common exit route – cash proceeds expected from a property sale such as your old home or apartment.
Renovation And Resale
You can also map out an exit plan to fix up a property and resell it for a considerable sum within 6 to 12 months.
You can opt for a leasehold term extension as a refinancing exit route. Get a closed bridging loan to fund the property purchase, and request a lease extension before changing to a mortgage.
It all boils down to cultivating the lender’s trust and confidence. Whatever exit plan you go for, the important thing is for the bridging finance lender to be assured that funds are forthcoming at a set date.
But bridging finance lenders come in all shapes and sizes – and choosing the best one can be a tedious process. Therefore, it’s highly recommended that you seek the advice and guidance of expert brokers like us when going through the loan application process. Specialist development finance lenders can help pass developments for commercial loans.
Read more: Bridging finance pros and cons
When Should Closed Bridging Loans Be Taken Out?
In a time of great uncertainty, it’s unsurprising that bridging finance lenders are partial towards loans with clear-cut exit strategies. Indeed, lenders and borrowers want to reduce the likelihood of repossessions as much as possible. Therefore, well-thought-out and reasonable closed bridging loans are redounded to the mutual interest of lender and borrower.
So when should you NOT get a closed bridging loan?
We advise borrowers not to take out bridging finance where a prospective property for sale has not received an offer. At the same time, we also reiterate never to take out an application if you have no planned exit in sight.
As experienced brokers, risky loans are never a good idea. Eventually, it’s a lose-lose for both borrower and the lender.
Use our bridging finance calculator to get indicative rates on your next bridging loan.
FAQ About Closed Loans
I Want To Take Out A Closed Loan. How Much Am I Entitled To Borrow?
It depends on the bridging finance specialists who package it for you. At Loan Corp, we can offer bridge loans from £10,000 to £250 million. We are fully regulated by the Financial Conduct Authority and adhere to data protection provisions under the Data Privacy Act. For more information, reach out to our team of master brokers.
Is A Bridging Loan Restricted For Specific Purposes?
Definitely not. We can assist you in securing bridging loans – whether an open bridging loan or a closed one – for whatever legal purpose.
What’s The Turnaround Time For Getting A Bridging Loan?
We handle the easiest to the most complex cases. We can deliver an indicative quote 2 hours after enquiry and secure your open bridging loan or closed loan in as fast as 24 hours! We’re able to provide this quick turnaround because of our strong partnership with more than 200 UK lenders and a dynamic team of experts and staff.
What Security Can My Loan Be Secured Against?
Any high-value asset can be security for your bridging loan – residential, commercial, land, or building plots are allowed.
What Upfront Fees Should I Pay?
No upfront fees are required. However, you may need to pay valuation fees if you don’t have a valuation report prepared.
Other than that, costs attached to securing a bridge loan are a one-time arrangement fee and other legal costs.
What Penalties Can I Incur If I Can’t Repay On Time?
The same rule applies to an open or closed bridging loan. Any individual or business borrower will be charged penalties if they can’t may repayments promptly – ranging from an additional 1% interest or more. The criteria for bridging loans will vary from lender to lender, and so will the penalties if you do not pay off your bridge.
Reach Out To The Experts
Securing a loan without information and with limited understanding can make the whole experience daunting. Every loan is risky, but being prepared and levelling your expectations will help you apply and get a bridging loan with peace of mind.
Enquire about getting a bridge loan with us to set your mind at ease. We have a highly efficient and well-organised team of expert brokers to assist you in getting your dream home or purchasing a property in an auction.