Closed Bridging Loans Unlike open bridging loans, which come with an open-ended repayment period, closed bridging loans are typically more appropriate for borrowers who have a clear exit strategy.
An example of a clear exit strategy is if you have already exchanged contracts and you know the date that you will receive your payment. If this is the situation you are in, then a closed bridging loan is the most suitable finance option.
A closed bridging loan is where the lender knows how they are going to repay the loan and what date they can reasonably do this by. This is known as an “exit strategy”. If you are confident that you can repay the loan from the sale of a property and you have a completion date for the sale, then a closed bridging loan is suitable for your situation. You can also repay the loan using other means, for example, if you are waiting for inheritance money to be released to you and you have a final date as to when the transaction will be completed.
If you are looking to release equity in a property that you own and you have already exchanged contracts, then a closed bridging loan is often arranged with a final repayment date that matches the date that the sale is set to be completed.
Some borrowers know when their long-term funds will become available to them in order to repay a loan. They’re likely to have their completion date agreed on and set in stone for their old property or they will know exactly when their mortgage will be agreed on. In these cases, it is possible to set a fixed date for the repayment for their bridging loan. When a final repayment date is agreed on and it has been set in stone, this financial product is known as a closed bridging loan.
The main difference between an open and closed bridging loan is the different repayment options. Whilst an open bridging loan is repaid when the client finds themselves able to pay closed bridging loans are short-term loans that come with a fixed repayment date.
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Closed bridging loans generally offer much lower interest rates, compared to open bridging loans, and are much more likely to be approved. Because you have a defined and clear exit strategy, lenders are aware that there is a low to no risk of the borrower not being able to repay the loan.
Whilst closed bridging loans give lenders a higher degree of certainty and confidence in receiving the repayment, if borrowers do not meet the terms to which they agreed as part of securing and agreeing on a closed bridging loan, then the financial penalties can be quite serious and extremely costly.
When you take out a bridging loan, lenders will usually need to see some form of evidence of the clear repayment strategy that you have planned. This could be from taking out a mortgage or using equity from the sale of a property. Lenders will usually also want to see evidence of the new property you are looking to purchase and the price you are wanting to pay for it. They will also want to see proof of what you are doing to sell your current property, should this be relevant to your situation. It is advised that you have a backup plan in place should your repayment strategy fail, for example, if your planned sale falls through.
Once a contract is set in place, the vast majority of property sales are usually finalised without any complications, so a lender is much more likely to provide finance. If you are looking to renovate or restore a property, then a closed bridging loan is suitable as you will be able to repay the loan back once your property or properties meet the requirements set out by your mortgage provider.
Closed bridging loans, depending on the property, tend not to have a minimum or maximum loan size, although less choice is available with the smallest and largest loans. A bridging loan is typically secured on the commercial or residential property in question Higher loan to values (more commonly known as LTV’s, which is the size of the loan compared to the value of the sale) are currently available on residential properties. Commercial properties are deemed as being more risky to bridging loan lenders, and a small LTV level is available.
Before you set out to get a bridging loan, it is recommended that you seek out the advice of a solicitor. This way, you can get all the legal advice and information you need before you sign any legal documents. It is also recommended that you seek financial advice from a respected and authorised mortgage broker. They are able to provide information and advice when it comes to buy to let property investments.
If you’re not sure whether a closed bridging loan is right for your unique situation, then get in touch to discuss your circumstances in confidence with our friendly and experienced team today. Submit your enquiry at any time and we will aim to get back to you within 24 hours.