Are There Different Types of Bridging Loans?
21st November 2024
By Simon Carr
Are There Different Types of Bridging Loans?
Understanding Bridging Loans
Yes, there are different types of bridging loans. These loans vary in how they manage repayment, interest, and specific uses. Bridging loans are short-term financial solutions. They help bridge financial gaps, especially for property transactions or urgent business needs. Understanding the various types of bridging loans can help borrowers select the right option.
In this article, we’ll explore the different types of bridging loans available, their characteristics, and the advantages and disadvantages each option offers. By the end, you should have a clear understanding of which type may best suit your needs.
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What are Open and Closed Bridging Loans
Open Bridging Loans
An open bridging loan is one of the most flexible types of bridging loans. Borrowers use this option when waiting for property sales or funds without fixed dates. Therefore, open bridging loans suit those without firm repayment timelines, though lenders may charge higher interest rates.
Key Features:
- Flexible repayment schedule.
- Useful when waiting for asset sales without fixed dates.
- Higher interest rates reflect greater lender risk.
Closed Bridging Loans
Closed bridging loans are a more structured option within the types of bridging loans. These loans have a fixed repayment date and are used for property sales or confirmed funding sources. Consequently, closed bridging loans are less risky for lenders and offer lower interest rates.
Key Features:
- Fixed repayment date.
- Suitable for those with confirmed funding timelines.
- Lower interest rates due to reduced lender risk.
Over recent years the difference between open and closed bridging loans has narrowed significantly. Most lenders will now consider a loan which is technically open. For example, the exit is a property sale but there is no agreed sale. The key point is, that lenders will consider this scenario provided they can see genuine intent to sell the property and believe the eventual sale price will be sufficient to redeem the loan.
Interest Types in Bridging Loans
Retained Interest
Retained interest is one of the key interest-handling methods within types of bridging loans. Borrowers pay no monthly interest during the loan term. Instead, they repay interest and principal together at the end of the loan.
Key Features:
- Interest is calculated and included upfront as a percentage of the total facility.
- No monthly payment burden.
- Interest and principal repaid at term-end.
Rolled-Up Interest
Rolled-up interest accumulates throughout the loan term without monthly payments. Borrowers pay interest and principal together when repaying the loan. This type is useful for those without steady cash flow during the loan term.
Key Features:
- Interest accumulates over time and compounds each month as the balance rises. This can represent a slight saving compared to retained interest.
- No monthly payments are required.
- The entire amount is paid at loan completion.
Serviced Interest
Serviced interest requires monthly payments during the loan term. Moreover, borrowers only pay the interest, leaving the principal unchanged. Interest in not deducted from the initial advance.
As a result, this option is ideal for borrowers who want to control overall loan costs or borrow at a higher loan-to-value.
Key Features:
- Monthly interest payments.
- The principal remains the same until repayment.
- Cost-effective compared to retained or rolled-up interest.
Non-Regulated vs. Regulated Bridging Loans
Regulated Bridging Loans
Regulated bridging loans are covered by the Financial Conduct Authority (FCA). They apply to loans secured against primary residences. These loans include more stringent protections around the exit, affordability checks and clearer terms.
Key Features:
- Regulated by the FCA.
- Applicable to primary residence loans.
- Borrower protections ensure fair and transparent terms.
Non-Regulated Bridging Loans
Non-regulated bridging loans typically fund investment or commercial properties. These loans do not include FCA protections. They are more flexible but carry higher risks for borrowers especially if they choose an unregulated lender.
Key Features:
- Not FCA-regulated.
- Used for investment or commercial properties.
- Higher risk, but flexible terms.
Uses of Bridging Loans
Bridging loans offer versatile financial solutions. They are used for property purchases, auction payments, or business needs. Developers often use them to fund refurbishment or construction projects.
Common Uses:
- Property Purchases: Quickly secure new property before selling an existing one.
- Auction Purchases: Provide immediate funds to meet tight deadlines.
- Business Cash Flow: Help maintain liquidity while awaiting payments.
- Development Projects: Finance refurbishments or construction before receiving long-term funding.
Conclusion
Understanding the types of bridging loans is essential for selecting the right financing option. Whether you need flexibility or cost control, bridging loans offer tailored solutions. By exploring the different types of bridging loans, borrowers can choose options that align with their financial goals and repayment abilities.
People Also Asked
What is an open bridging loan?
What is a closed bridging loan?
Tell me the difference between regulated and unregulated bridging loans.
Explain the difference between residential and commercial bridging loans.
Can I get a second charge bridging loan?
Promise Money is a broker not a lender. Therefore we offer lenders representing the whole of market for mortgages, secured loans, bridging finance, commercial mortgages and development finance. These loans are secured on property and subject to the borrowers status. We may receive commissions that will vary depending on the lender, product, or other permissable factors. The nature of any commission will be confirmed to you before you proceed.
More than 50% of borrowers receive offers better than our representative examples
The %APR rate you will be offered is dependent on your personal circumstances.
Mortgages and Remortgages
Representative example
Borrow £270,000 over 300 months at 7.1% APRC representative at a fixed rate of 4.79% for 60 months at £1,539.39 per month and thereafter 240 instalments of £2050.55 at 8.49% or the lender’s current variable rate at the time. The total charge for credit is £317,807.66 which includes £2,500 advice / processing fees and £125 application fee. Total repayable £587,807.66
Secured / Second Charge Loans
Representative example
Borrow £62,000 over 180 months at 9.9% APRC representative at a fixed rate of 7.85% for 60 months at £622.09 per month and thereafter 120 instalments of £667.54 at 9.49% or the lender’s current variable rate at the time. The total charge for credit is £55,730.20 which includes £2,660 advice / processing fees and £125 application fee. Total repayable £117,730.20
Unsecured Loans
Representative example
Annual Interest Rate (fixed) is 49.7% p.a. with a Representative 49.7% APR, based on borrowing £5,000 and repaying this over 36 monthly repayments. Monthly repayment is £243.57 with a total amount repayable of £8,768.52 which includes the total interest repayable of £3,768.52.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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Authorised and regulated by the Financial Conduct Authority – Number 681423The Financial Conduct Authority does not regulate some forms of commercial / buy-to-let mortgages
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