Bridging finance is one of the best ways to cover any shortfalls at times when you are involved in an arbitrage or need urgent cash without wishing to go through 'full status loans' (ones involving credit checks, income assessments et al). In summary, they make it much easier for Borrowers to arrange quick cash - that's their bottom line. They are quick and relatively easy to get.
The main purpose of a bridge loan, as the name would suggest, is to bridge the gap between the cost price of an asset and the borrower's budget such as in cases when they have just bought a home post selling the older one and waiting for the proceeds to come their way. Through bridging finance, they buy the new house and get some time by their side to collect the proceeds and pay off.
What differentiates bridging finance from mortgages is the higher risk it carries and the way it is underwritten, with only the borrower's property as the collateral. They generally come in two formats: Open Bridging Loan and Closed Bridging Loan
Differences between Open and Closed Bridging Loans
Open Bridging loans allow borrowers borrow money even when the sale of a specific property is not involved. It works out to be the ideal choice when one needs money to improve a property in order to achieve a better sale price, or even just for a quick business cash injection. Payment term is shorter, usually between 6-9 months, and the amount borrowed is to be paid back before the term expires. Loan amounts are relative to property values and this is usually determined by a property appraisal or by looking at what nearby properties have sold recently for. However, the "open" nature of these loans is due to the fact that there isn't necessarily a fixed repayment date - hence the name - but there will be a maximum term of the loan. As usual, of course, in case of non-payment, the property can be repossessed by the Lender.
Open loans take longer to process and require more details from the borrowers, therefore, if you wish to use this option, it is best that all the paperwork is in place.
Closed bridging loans are different from open bridge loan in the context of being more structured and limited in their scope. While they are cheaper, they are limited to property specific cases where the Borrower has just bought a new house and is waiting for the proceeds from another house sale to pay the purchase price, or has just bought a property in an auction or have bought a place and looking for mortgage. With closed bridging loans, one can pay for the new house and payoff the loan through the proceeds from the sale of another. Closed bridging loans probably work out best in cases where the Borrower doesn't have a good credit record. They are easier to process and take less time as well. In cases of non-payment, usually penalties are levied rather than repossession. Most of the times, the maximum payoff window is not more than 6 months within which the entire amount must be paid off.
In summary, there is no one "better" type of bridging loan but it depends on your individual circumstances.
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