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The information provides the differences between an open and closed bridging loan and will answer questions about the comparison between open and closed bridge loans so that you can determine which option will be for you.
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✓ Interest rate from 0.33% per month
✓ second charge loans from 5.99% per annum
✓ Borrow up to 80% LTV
✓ Borrow from £20,000 – £1 Billion.
A bridging loan is a loan that bridges the gap of purchasing a property or asset while the current property or asset sells.
This loan is short-term. You’ll be able to get the money in some cases within a week after the loan application.
It’s a fast and flexible loan for a person who needs a short term loan for a time duration typically inside 12 months.
This loan may be more expensive then a regular mortgage with the interest rates, but this is due to the loan being riskier and shorter.
So for people who are looking to buy a new home and company directors who are in need of cash flow for their business. Having no access to instant money, and have the source of finances within 6-12 months, a bridging loan can be an ideal solution.
These loans can be classified into two types, one is a closed bridging loan, and another is an open bridging loan.
You can opt for an open bridging loan, closed bridging loan, regulated or an unregulated bridging loan for a person or a company.
A closed bridge loan is a loan with a distinct exit strategy.
Opting for closed bridging loans, you will have to evidence the way you will make the repayment.
Bridging lenders who distribute a closed bridging loan gets a clear understanding of your financial structure and the exit strategy. Hence a closed bridging loan has a lower interest rate than an open bridging loan.
This type of loan makes sure the creditor gets their invested money within the specified time.
If a borrower fails to refund the amount of loan, then the creditor gets the right to auction his mortgaged property to get their money back. (There are penalty steps before the auction)
The borrower can borrow up to 80% of the property value.
Mr Richered wants to buy a 50,000₤ home within a week, and he has an existing property of 65,000₤.
The lender offered him a bridging loan with 1.5% interest for three months after checking the viabilities of his mortgage. He accepted the terms and conditions of the lender.
The lender approved 52,000₤ loan for 1.5% interest in for three months. And the credit was passed within a week.
He got his new home within a week after he borrowed the money from the lender.
He refunded the creditor before the exit time with the selling price of his old property, which he sold after one month of getting the loan.
|Amount of loan||52,000₤|
|Interests after 3 months||(1.5%) 780₤|
|Typical exit fees||1%|
An open bridging loan is a loan that has no clear exit strategy. Example, when the borrower gets the amount of money after to repay, he sells his equity shares or after he gets the profit of his upcoming business deal.
The interest rates can be dependent on the evidence that has proof of the borrower’s income.
An open bridging loan is typically for the short term. So a borrower can borrow up to 18 months at a typically higher interest rate, and the credit can be extended.
For example, you may be looking for share sales at the end of the year for of your company, and you are in the middle of the year and require some finances short term for a particular project or deal.
In this case, you can take a bridge loan for six months and use the money on your project and repay the funds with the selling price of the shares.
Mr.Rockey wants to catch the Christmas season for significant sales of his products, but it is currently in the middle of June, and he needs money for the preparation of December.
His financial advisors recommended him a bridge loan for six months with a 3% interest rate per month.
Having a look at his previous business profits, the lender decided to give him a 50,000₤ loan for his business in 3% interest. (This is the 65% of his net profits)
He accepted the offer and applied for a loan.
He got his expected loan in 48 hours, and he started his preparation for Christmas.
After the Christmas season, his plan worked out, and he refunded the amount of loan he took from the bank.
Mr. Rockey’s Loan related transactions are:
|Amount of loan||50,000₤|
|Amount of interest after 6 months (3%)||9000£|
|Agreement fee (1% of the loan)||500₤|
|Typical exit fees||500₤|
A closed bridging loan is more beneficial for a borrower than an open bridging loan because of an exit route and gives a lender an actual date to get the loan repaid. So the lender accepts lower interest rates.
Bridging loans are un-regulated unless it’s against your personal property, the borrowers should have to be watchful whether there are no hidden charges or extensions while they are taking the loans.
If the borrowers have a precise completion date to get the money of the project, they can choose the closed bridging loan, or if they don’t have the exact completion date, the open bridging loan is perfect for them.
An open bridging loan is more expensive than a closed bridge loan
A closed bridging loan is usually around six months and an open bridging loan around 12 months.
There are usually penalties if you exceed the time scales.
Whenever you opt for a bridging loan, please speak to someone who can guide you whether it’s the right loan to take as there may be cheaper alternatives. We at Property Finance Partners can guide you on what is the best option.
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Call 020 3393 9277