Open Bridging Loan

What is an open bridging loan and how does it work?

An open bridging loan is a short-term finance product. We typically refer to them as unregulated loan facilities. There’s no fixed repayment date, although we’ll have a term for the product – usually 12, 18 or 24 months.

‘Open’ just means there’s no fixed date during that time, and there’s no repayment vehicle already lined up. In other words, we haven’t already got a sale or refinance confirmed.

What is the difference between an open and a closed bridging loan?

Typically, a closed bridging loan will apply to a regulated loan facility, on a home you’re going to live in or are already living in. Lenders will want that fixed at 12 months maximum, with a clear exit strategy outlined before the loan facility starts.

You might be selling the house and it’s already on the market, or you have refinance in place that you can show the bank on application. That’s a closed bridging loan.

With an open bridging loan, we haven’t got an exit yet. The idea might be to sell the property, but you’re refurbishing it and it’s not finished. We don’t know the end value for certain. Nothing’s absolutely concrete – you might keep it, you might sell it.

Why is it important to have an exit strategy?

It’s important to have one regardless of whether you’re going for an open or a closed bridging facility. We need to know how you’re going to repay the loan facility at the end.

If you don’t know what your exit strategy is, it’s very difficult to calculate the next steps. If you’re going to sell the property, you’re going to get all your equity back. If you’re going to keep the property as a Buy to Let, the refinance is limited to 75%, so you’ve got to retain some equity.

That might mean that any plans to do another project might not work, because there’s not enough cash coming out. Having those conversations early on is crucial to understand what it could look like, how it’s going to work and how that impacts your business model.

What can an open bridging loan be used for?

Pretty much anything. We can use it for auction purchases, buying property below market values, refurb projects and flips – so property development stuff.

They can be used if you’ve already developed something from the ground up and now you want 12 months to either sell or refinance the units. Or if a chain breaks – where you’re in the middle of a purchase and you want to break that chain by becoming a cash buyer.

They can also be used for tax bills and other personal expenses, depending on the lender and how they categorise their capital raising.

Should I choose an open or closed bridging loan?

The reality is that you won’t choose one. The lenders will choose that for you. If it’s regulated and you will live there, we will work with a certain set of lenders and a certain set of criteria. It automatically becomes a closed bridging loan.

They will want to see an exit strategy in place – either the property being listed for sale, or a Decision in Principle with a bank to say you can progress with a mortgage. One of those things has to be in place.

What you’re trying to achieve will dictate whether it is regulated or unregulated, closed or open. It’s not really down to choice.

Why is open bridging more expensive than closed bridging?

It can be more expensive, although it depends on the Loan to Value and a lot of other factors. The essential trifecta is your credit position, income position and the property. If one of those things is quirky, rates tend to go up.

Open bridging can be more expensive because it’s unregulated, because it’s on an investment type property. People are more likely to default on an unregulated investment property than on their own home.

With a regulated, closed bridging facility, the lenders already have an exit strategy in place. The risk is reduced because they know there’s something to repay them at the end of the term.

With open bridging, that’s not guaranteed. You haven’t proven that there’s a sale or a refinance in progress. The risk is that you don’t exit the loan on time and they have to repossess.

Can I still get an open bridging loan if I have bad credit?

Yes, you can have the worst credit imaginable. We actually saw one client with an Experian credit rating of zero, which I thought was impressive. You’ve got to work really hard to get that. But some banks will still lend to you.

The rate will be higher and there might be Loan to Value restrictions. There might be a lot of other caveats in the loan agreement. But we can still get you a bridging loan even with very, very bad credit.

How do I get an open bridging loan? What’s the process?

A lot of the lenders are broker-only. They don’t deal with clients directly – they just don’t have the capacity to deal with all those enquiries.

As brokers we filter what is and isn’t possible and where to take it. That means the right lender gets the right enquiry. So come and speak to a broker – hopefully us. Outline what you’re trying to achieve and we will know pretty quickly which lenders we can and can’t use.

We’ll explore any complexities upfront, whether that’s credit, property details, exit or something else. Then we will speak to the lenders, get Decisions in Principle and present those back to you.

If you want to proceed from there, we process the full application and manage the valuations and legals, too.

What are the pros and cons of an open bridging loan?

It’s about flexibility around the repayment vehicle. Because you haven’t had to prove something up front, there’s more flexibility in how we do it. You might decide to keep this property as an investment, or instead to sell it..

There are lots of other options available to you with an unregulated investment open bridging loan.

Bridging loans tend to be a little bit quicker in processing – there is less due diligence applied because they’re unregulated. We don’t have to go through so many hoops with underwriters.

All the legal stuff obviously still applies. One disadvantage is slightly higher interest rates, and usually increased risk for the lender, but that doesn’t really apply to you as the client.

What else do we need to know about open bridging loans?

Brokers add a lot of value, especially with bridging and development finance, because these aren’t retail products. You won’t be going to Barclays or HSBC, looking at their products and choosing the one you want.

While some lenders advertise bridging, those products are fluid. We can pressure the rate or change the terms. Some lenders will give us preferred rates anyway, so what you see online isn’t what you’ll get with the right broker. We can get almost a 10% discount with some lenders on their marketed rates.

Bridging lenders tend to be very commercially minded. If a case isn’t quite simple, with complexities or quirks, presentation is key. How we present that to a lender and manage that through with the underwriters is vital.

If you don’t answer questions correctly, or just present it in the wrong way, your case can be declined. Brokers can get you to the right place, first time, and make the process a lot less painful.

SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.