Open Bridging Loan

Hello, and on this episode of the Bridging Finance podcast, Scott returns from Propertyze to talk all about an open bridging loan. It's great to chat with you again, Scott. How's it all going? Very well, thank you. Thanks for having us back. You're very welcome. Let's get straight into the questions that we've got here then. So of course, first of all, just to recap really, what is an open bridging loan and how does this all work? An open bridging loan is a short term finance product. We typically refer to them as unregulated loan facilities. So there's no fixed repayment date, although we have a term for the product, so usually 12 months, I think you're 18, 24 months. There's no fixed date during that

time and there's no repayment vehicle already lined up. So we haven't already got a sale or a purchase or refinance confirmed. There's no guaranteed exit plus strategy currently in place. Right. Okay, there we go. So that explains it all there in a nutshell. So let's follow on with this next question. What is the difference then between an open and a closed bridging loan or bridging finance? So it's not exclusively this, but typically how you'll find it is a closed bridging loan will apply more to a regulated loan facility. A regulated bridging loan is a home that you're going to live in or are living in and the lenders will want that fixed at 12 months maximum and they will want an extra strategy outlined before the loan facility

starts. That's a closed one. We know that we're selling the house houses on the market, we have a refinance in place. We can show the bankers in the first place closed bridging loan. Open bridging loan, we haven't got one yet. The idea might be that we sell it, but it's not finished because you're refurbing it. So we don't have the value for certain. So nothing's absolutely concrete. You might keep it, you might sell it. We haven't got anything in place yet. Right. Okay. So there we go. The differences between the two there. Now, this is always a popular question, isn't it, when it comes to bridging? So 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, truly because we need to know how you're going to repay the loan facility at the end. And if you don't know what your exit strategy is, it's very difficult to calculate next steps. You know, if you're going to sell the property, you're going to get all the equity back. If you're going to keep the property as a buy select potentially, then the refinance is limited to 75%, which means you've got to retain some equity. That might mean that your next step of doing another project, for example, might not work because there's not enough cash out. So having those conversations early on, understanding what it could look like, how it's going to work and how that impacts the business model. If

there's repeat business going on, it's quite crucial. Okay. So something to bear in mind. They're a key pointer to take away from the episode. Let's move on to this question then, just to go into a little bit more detail. So what can an open bridging loan be used for? Pretty much anything. So we can use it for auction purchases, buying property below market values, refurb projects, stuff you want to kind of refurb and flip. So property development style stuff, development completion. So you've already developed something from the ground up. And now you want 12 months to either sell the units or to refinance them, development exit strategy, chain breaks. So if you're in the middle of a purchase and you want to break

that chain, but become almost a cash buyer by using them, that can be used for tax bills and other personal expenses too, depending on the lender and how they categorise their capital raising. But lots of options. Yes, lots of reasons there as to why you might use an open bridging loan then. So following on to the next two questions here, this is interesting. So should I choose an open or closed bridging loan? How do I know which one is right for me? You might have touched on a few of these points actually, but yes, yeah, there we go, Scott. Reality is that you as the client won't choose one. The lenders will choose that for you. So if it's going to be regulated, you can live in it, it's going to be a certain set of lenders, certain set of criteria,

it will become a closed bridging loan automatically. They will want to see an extra strategy in place, proven, whether that's the market, the property on the market listed for sale, or that's a decision in principle with a bank to say that we're progressing with every mortgage. One of those things has to be in place pretty much. So the bank will tell you it's closed. They will refer to it as regulated and it was open, you know, unregulated transactions, because everything else. So you don't really need to choose yourself. The lender choice, what you're trying to do or achieve will dictate whether they're regulated or unregulated closed or open, I reckon. Right, okay. So that's really useful to know there then. Let's

continue on. We're getting through these questions now. So why is open bridging more expensive than closed bridging? Is it, Scott? Can be. Depends on the lender values. It depends on a lot of factors. The credit position that I was going to send the trifecta, the 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 unregulated, and that means it's more, it's an investment type property. People are more likely to default on an unregulated investment property than they are to default on their home regulated property. And with the regulated loan, the closed bridging facilities, the lenders already have an extra

strategy in place. So the risk is reduced because they know there's something in there that's going to repay them at the end of the term. The open bridging, that's not guaranteed. You haven't proven that there's a sale or refinance in progress. So the risk for them is that you don't exit the loan on time and they have to repossess. So there's a risk difference to the lenders. Yes, so makes sense there. Okay, so we've got four questions left for this episode. People would like to know, 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 with a client who had an experienced credit rating of zero. Right. It was very impressive. You've got to learn really

hard to do that. Some banks will still lend to you. The rates will be higher, the loan to value restrictions might be there, 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. Right, wow. Well, there we go. If we've got anybody listening that that might apply to, hopefully that's reassuring there. Right. Okay, so how do I get an open bridging loan then? What's the process? And Scott, as always, this is where a broker can come in and help. Absolutely. So there's a lot of lenders out there that are broker only, they don't deal with clients directly. They just don't have the capacity to deal with all those inquiries. So we

brokers firstly filter what is and isn't possible and where to take it. So the right lender gets the right inquiry. So really, come and speak to your broker, hopefully us, outline what you're trying to achieve. And we will know pretty quickly which lenders we can and can't use, any complexities we need to address upfront, whether it's credit, property details, exit, any manner of issues. And then we will speak to lenders, consistent principles, present those back to the clients. And then if they want to proceed from there, process the full application and manage the valuations and legals too. Right, okay. Well, thank you for that a mini step by step guide there of the process and what to expect when applying for a bridging

loan. Now, just in summary, really, Scott, again, you've probably covered a few of these points already, but what are the pros and cons of an open bridging loan? Flexibility on the repayment vehicle. So because you haven't had to prove something up front, there's a bit more flexibility in how we do this. So you can, you can decide actually, I want to keep this one as an investment property. You actually want to sell it, or to sell it to my brother's company. There's lots of other options available to you with an unregulated investment, open bridging loan. So and bridging loans tend to be a little bit quicker in the processing of them just because there is less due diligence applied because they're unregulated. So we don't have

to go through as many hoops with underwriters. So all legal stuff obviously still applies. The cons are that they are slightly higher interest rates, usually increased risk for the lender, but that doesn't really apply to the clients. And that's about it really, to put us with you that open bridging loans, I say, is a general rule of thumb applied to investment and closed regulated bridging loans applied to your home, a place you're going to live.

Right. Okay. So again, that explains all of that there. Now, just lastly, you've demonstrated how a broker can help here Scott, but is there anything else you'd like to add or do you think we've covered all that we can here? Now brokers add a lot of value, especially with bridging and development finance, because they're not retail products. It's not going to Barclays, HSBC, looking at their product guide and going, oh, that's the one I want. While there are products that the banks will advertise, the lenders will advertise for bridging. Those are a little bit fluid. We can, we can pressure the rate, we can change the terms. Some of the lenders will give us preferred rates anyway. So what you see online isn't what you'll get if

you come through the right broker. So we can get almost a 10 cent discount on a couple of lenders to their marketed rates. There's those points and its presentation. Bridging lenders tend to be very commercially minded. So if a case isn't quite simple, there's a few complexities or a few quirks, presentation is key. And I've said that a lot on a lot of these podcasts. How we present that to a lender, how we manage that through with the underwriters is vital. Because if you don't answer those questions correctly, you just present it in the wrong way. Your case will be declined. Right. So brokers can take you to the right place the first time and make the process a lot less painful. Okay, well, thank you that. There we

go. Some final points to end on there. Thank you ever so much, Scott, as always. Hopefully that's proved useful to anyone listening to this. And I'm sure we'll catch you on another episode soon. Look forward to it. Thank you. Please note, SunBridging Finance is not regulated by the Financial Conduct Authority.