Open vs Closed Bridging | Understanding the Risk Difference

Every bridging loan in London is unique, and not all bridging loans are expensive or risky. An important factor is knowing the difference between the two types of bridging finance, open or close bridge, which may mean not all bridge loans are suitable for your circumstances.

Closed Bridging Finance

A closed bridging loan means that the Borrower has an existing, agreed exit strategy. For example, his vendor has agreed to settle on his existing property by way of an unconditional sale and purchase agreement, and that the settlement of that sale will occur after the date by which he must settle on a new property.

Here, the bridging facility is secured by a binding contract of sale with an agreed-upon date of repayment. Since there exists a tangible route of repayment, closed bridging finance is often deemed to be less risky.

Lenders, though, will still consider a range of issues before agreeing to a closed bridge. These can include the strength of the purchaser, whether the purchaser is an individual or a company, purchase price, deposit, GST issues, and contractual provisions that may affect the likelihood of the settlement occurring. All of these will impact the strength of the exit strategy.

Open Bridging Finance

Open bridging finance can be used where a sale agreement hasn't yet been agreed when the funding is set up. If the buyer needs to settle on a new purchase although the sale agreement isn't yet, there is no fixed date for repayment.

Hence, open bridging involves a greater exposure to risk for both parties. In the absence of a secure source of revenue, the lenders are required to perform a wider scrutiny process in order to assess the truthfulness of the possible exit plan.

Even though a higher risk, open bridging can work well for the right type of deal if it's set up correctly. If you think about most property transactions, we can often miss out on opportunities if we 'sit and wait' for our existing property to sell. The deciding factor is not whether a bridge is open or closed, but whether the lender is happy from a security vantage point, market place, sale strategy, client profile and repayment planning perspective.

What Lenders Look For

When appraising an open bridge, the lenders should have assurance that the exit strategy is viable and will be achieved. This will involve an appraisal of the suggested sales process, exit timescales, available market demand and value of the property.

Lender will also want to ensure that the borrower has sensible expectations of sale price and is willing to sell under prevailing market conditions. Large difference between vendor expectations of selling prices and market conditions can extend the timescale and heighten the risk of bridged finance.

Choosing the Right Bridging Solution

Either open or closed bridging can be an effective, realisable facility if used in the right context. Closed bridging is considered the lower risk form as repayment is secured by the downside contractual sale. The open bridging has more uncertainty as the exit is not yet obtained but can be a very effective and successful approach if supported by high security, a proven sales approach and clear plan of repayment.

Silver Oak Capital provides on and off bridge financing to suit the needs of specific borrowers and transactions.