GUIDE TO BRIDGING FINANCE
Open and closed loans
An open bridging loan means a bor- rower wants to buy a property before selling their existing home. It is the traditional use of a bridging loan to grease the wheels of the housing market. It poses higher risks for lenders and borrowers as the sale could take time to complete and bridging loans have high rates. A closed bridging loan is far less com- mon and describes the situation when contracts have been exchanged but the property has not been sold, meaning the risks are much lower. Both are used for a plethora of rea-
sons whether it is upsizing, downsizing or just moving. Bloomfield says the difference is that
closed bridging provides far greater cer- tainty for lenders and borrowers “An open bridging loan is when the
parties are not contractually bound to complete a transaction, meaning there is no certainty to repay the bridging loan,” he says. “A closed bridging loan occurs when
a borrower might be selling one house and buying another. They may have exchanged contracts to sell and ex - changed contracts to buy so there is no speculation or uncertainty about repay- ment times.”
Proc fees Bridging proc fees are generally higher than those in the mainstream market and can hit up to 1% per deal. There are variations between lenders and some have fierce competition trying to attract brokers with higher fees. Hugh Wade-Jones, director at Enness
Private Clients, says proc fees operate slightly differently, with lenders looking to keep some of the money. “Generally a lender will want to
retain a certain amount from a deal and the broker is free to charge what they wish in addition,” he says. “It’s not an ideal situation and often leads to inconsistent charges to clients
6 The
but on the flip side it’s a complex process and often labour-intensive, so fees need to differ from case to case.” One controversial area of remunera- tion has been override commission where lenders or packagers offer bro- kers a bonus to direct a certain amount of business their way. The FSA has banned the practice on
regulated loans and last year issued a warning to remind bridgers not to in - dulge in it.
How interest rates work Repayments on mainstream mortgages comprise straightforward monthly payments that almost everyone can understand. The repayment of bridging loans is
more complicated, with the standard monthly method a rarity because of the higher rates. Ray Cohen, partner at Jackson Cohen,
says the higher rates mean most people cannot afford to pay monthly so there are two main generic structures for pay- ing interest. “First, there is rolled up interest
which effectively adds the monthly interest to the total balance and borrow- ers repay everything at the end,” he says.
“Secondly, and more popular, is
retained interest, meaning borrowers borrow the interest as well as the loan. So if you borrowed £100,000 at 1% a month for six months the interest would amount to £6,000 meaning you only bor- row £94,000. “Essentially the lender retains the
interest during the entire loan rather than charging every month,” he adds. “If borrowers redeem the loan early
there aren’t normally any early redemp- tion charges. It works out slightly more expensive to go for retained interest rather than rolled up interest but the for- mer is more popular too. Both are more common than standard monthly pay- ments which are rare as most people can’t afford them.”
guide to Bridging Finance 2012
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