Bridging loans are a type of short-term funding lasting for 1-24 months. They are used to finance the gap between a purchase and arranging, or being able to arrange, a longer-term source of finance. A key benefit is that they are fast, with completions within 3 days for loans up to £200k, and within 14 days for loans up to £250m.
Bridging loans can be used for a vast array of reasons, but most commonly in the UK, they are used for buying properties, developing, renovating or refurbishing properties, buy-to-let investments, as well as settling tax bills, investing in business ventures & finalising divorce settlements.
This article delves into the different bridge loan types and their features.
Closed Bridging Loans
The most common type of bridging finance, a closed bridging loan comes with a fixed final repayment date; usually following the completion of your new property purchase.
Borrowers must agree on the date before signing off on a closed bridging loan. The fixed repayment date gives lenders a higher repayment guarantee, providing relatively lower interest rates for closed bridging loan borrowers. For this reason, closed bridging loans tend to be a mainstay for property owners with a significant sale guarantee.
Open Bridging Loans
Open bridging loans are the direct opposite of closed bring loan options. They are issued with no fixed repayment dates. Open bridge loan providers demand borrowers to satisfy several requirements, including a viable method you intend to repay the loan; this is your exit strategy. The exit strategy is likely to be the sale of a property.
First Charge Bridging Loans
Bridging loans may also fall under first charge or second charge loans. If a bridging loan falls under a first charge bridging loan, the borrower has multiple financial commitments tied to the property.
First charge bridging loans also apply to auction purchases. Lenders issue this bridging loan type if borrowers opt to repay their loans through a property sale or remortgaging. Lenders will thoroughly assess the property and levy a charge on the loan application. The charge aims to prioritise the lenders in the repayment order above all other financial commitments and lenders.
This loan attracts a lower interest rate due to the low underwriting risk attached to the loan process.
Second Charge Bridging Loans
Like all other bridging loans, a second charge loan provides borrowers with additional funding to finance a property that already has a finance commitment by another lender. It’s usually more expensive than first charge loan options due to financial providers’ additional risk.
Often, second charge bridging loans sit behind existing loans or mortgages. It applies if lenders can determine the equity tied to the property, ensuring it’s enough to secure another loan. Borrowers can secure second bridging loans on all property types, including buy-to-let, residential, commercial properties, etc.
In short, these are the basic bridging loan types, even though some providers can offer other types to accommodate anomalies beyond the major bridging loans highlighted in this article.
