When you need quick property finance, understanding your bridging loan options makes all the difference.
At first glance, open and closed bridging loans might seem similar, but the right choice can significantly impact your property transaction or business venture. Let’s explore how each option works in practice.
Bridging Finance Explained
Before we explore the differences between open and closed loans, let’s understand how bridging finance works in general terms.
How Much Can You Borrow?
Most bridging lenders offer loans from £150,000 up to £25 million.
The amount you can borrow depends on your property’s value – typically 75-80% loan to value for residential property and 60-70% for commercial assets. Some lenders offer up to 100% LTV with additional security.
Property Types and Security
Bridging lenders need security, usually in the form of property or land.
This can include:
- Residential properties, including those needing renovation
- Commercial buildings, from offices to warehouses
- Mixed-use properties like shops with flats above
- Development sites with or without planning permission
Your property’s condition affects both loan availability and terms. Even unmortgageable properties can secure bridging finance, though this will affect your rates.
Speed and Process
Fast bridging loans are designed to complete quickly, normally within 5-10 days.
Here’s what to expect:
Initial assessment takes 24-48 hours. The lender reviews your property details, proposed exit strategy, and basic circumstances. You’ll receive an agreement in principle outlining potential terms.
Next comes valuation – usually completed within a week. The surveyor assesses your security property’s value and condition, providing a report that helps determine final loan terms.
Legal work follows. Your solicitor handles searches, reviews titles, and ensures all lending requirements are met. Using an experienced property lawyer will speed up to the time to completion.
Costs and Interest Options
Interest on bridging loans works differently from traditional mortgages.
You have three main options:
Monthly serviced: You pay the interest each month, reducing your final repayment.
Rolled-up interest: Interest accumulates and gets paid with the loan at the end. This helps with cash flow but increases your final payment.
Retained interest: The lender deducts the total interest upfront from your loan amount.
Read more: How Do Bridging Loan Interest Options Work?
Beyond interest, expect to pay:
- Arrangement fees (up to 2% of the loan amount)
- Valuation fees based on property value
- Legal fees for both you and the lender
- Possible exit fees
- Administration charges
First and Second Charges
Most bridging loans take a first charge position on your property – similar to a mortgage. However, second charge loans are possible if you already have a mortgage. These carry slightly higher rates due to increased lender risk.
Read more: First, Second & Specialist Charges in Bridging Finance
Exit Strategy Requirements
Your exit strategy is ‘how’ you intend on repaying the loan, by the end of the term.
A clear exit strategy proves vital for any bridging loan. Common exit routes include:
- Property sale
- Refinancing to a long-term mortgage
- Development completion and sale
- Business sale or investment maturity
Lenders assess your exit strategy’s viability carefully – it directly affects your loan terms and approval chances.
Open Bridging Loans
Let’s look at an example: Say you’ve found an amazing investment property in Leeds’ hot market.
Your current property in Manchester would more than cover the cost but you want to wait for the right offer rather than rush the sale. An open bridging loan lets you buy the new property while marketing your existing one properly.
The exact date of repayment is not yet known, but the lender will need their money back by the end of the term.
The flexibility of open bridges is particularly useful when:
- You’re renovating a property and want to maximise its sale value
- Market conditions suggest waiting will get you a better price
- You’re waiting for business proceeds without fixed completion dates
- Property chains are complex and timing is uncertain
This flexibility comes at a cost as lenders price in the extra uncertainty. But many property investors find it’s worth it when it helps them grab opportunities.
Closed Bridging Loans
Closed bridging loans require clear proof of your exit strategy and a specific date for repayment. Broadly speaking, this means you need to have already exchanged contracts to qualify.
Imagine this scenario: You’ve won a property at auction and your mortgage lender has already issued a formal offer. You know exactly when the mortgage funds will arrive but it’s two weeks after the auction’s completion deadline.
A closed bridge fills this specific gap perfectly.
The certainty around repayment usually means better rates and faster approvals. Lenders can see their risk timeline and are more comfortable with the arrangement.
The Key Difference: Exit Strategies
The main difference between open and closed bridging loans is your repayment plan – specifically how certain you are about when and how you’ll repay the loan.
With a closed bridging loan you’ll have a fixed repayment date based on a confirmed source of funds. For example if you’ve exchanged contracts on your current property but the completion dates don’t align with your new purchase you know exactly when the funds will arrive.
Open bridging loans give you more flexibility with timing.
You still need a plan to repay but you don’t have specific dates in place. This suits situations where you’re confident about selling a property but haven’t found the right buyer yet.
Read more: Bridging loan exit strategies
Which One Is Right For You
Your situation will determine whether an open or closed bridge is best for you.
Consider:
A closed bridge makes sense when you’ve exchanged contracts on a property sale or have confirmed dates for incoming funds. You’ll get better rates because of the reduced risk.
But if you’re renovating a property and want flexibility on the sale timing, an open bridge offers a more practical solutions.
Let’s Get Started with Bridging Finance
At Respect Capital we’ve helped many clients through successful bridging deals across the UK property market. Experience shows that preparation is key to a smooth process.
Preparation includes:
- Knowing your exact needs
- Having property details ready
- Proof of income
- Clear exit strategy
Every property transaction is different. We’ll help you assess your situation and find the right bridging solution for you, open or closed.
Speed is important in property deals but taking time to get the right advice up front saves you costly mistakes.
FAQ
Closed bridging loans tend to offer lower interest rates because lenders view them as lower risk due to the guaranteed exit date. Open bridging loans usually cost more due to the uncertainty around repayment timing.
Bridging loans typically run from 3-36 months. Closed bridges will have shorter terms aligned with your confirmed exit date, while open bridges usually offer terms up to 12-18 months.
The average term of a bridging loan is 12 months, and regulated loans (on your own home) have a maximum duration of 12 months.
Read more: How long can you have a bridging loan for?
Yes, as bridging loans are primarily secured against property rather than based on credit history. However, a poor credit history might affect your interest rates and the number of lenders willing to consider your application.
A small number of lenders offer non-status loans, where credit checks are not required.
Yes, typically 20% of the property’s value, depending on the type of property and your circumstances. Some lenders might offer higher LTV with additional security.
Read more: Do You Need a Deposit for a Bridging Loan?
Yes, most bridging loans can be repaid early. Some lenders charge exit fees or early repayment charges, while others don’t – check your loan terms carefully.
Read more: Can You Pay a Bridging Loan Back Early?
Yes, bridging loans are commonly used for auction purchases where buyers need to complete within 28 days. Both open and closed bridges can work, depending on your exit strategy.
Bridging loans secured against your primary residence are regulated by the FCA. Loans for business or investment purposes typically aren’t regulated.
Read more: Are bridging loans regulated by the FCA?
Yes, you’ll need a solicitor, and the lender will also appoint one. Using an experienced property solicitor familiar with bridging finance can speed up completion.
Read more: Do I Need a Solicitor for a Bridging Loan?
