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Closed bridging loans are a popular financial product for those needing quick access to funds, typically when property transactions or investments are time-sensitive. Unlike open bridging loans, closed bridging loans have a fixed repayment date and are often used when the borrower has a clear exit strategy, such as selling a property or securing a longer-term loan. However, securing a closed bridging loan can be challenging, as lenders typically have stringent eligibility criteria to ensure the loan is repaid on time.
1. Credit Score Requirements
Your credit score is one of the first factors lenders will assess when determining whether you are eligible for a closed bridging loan. While bridging loans are generally more accessible than traditional loans, especially for those with less-than-perfect credit, a higher credit score can improve your chances of approval and secure more favourable terms.
In the UK, lenders typically prefer borrowers with a score of 600 or above, which is considered a fair credit score. However, many bridging loan providers are more flexible. They may approve applications from individuals with lower credit scores, particularly if they have a strong property portfolio or the loan is secured against a valuable asset. If your credit score is lower than ideal, you may face higher interest rates, as lenders view you as a higher risk.
2. Property Valuation
Since a closed bridging loan is secured against a property, the value of the property you intend to use as collateral is crucial in the lender’s decision-making process. Lenders typically require a professional property valuation to assess its worth and determine the loan-to-value (LTV) ratio. The LTV ratio is the percentage of the property’s value that the lender will lend you.
For closed bridging loans, most lenders will offer up to 70% LTV, although this can vary depending on the type of property and the lender’s policies. For example, a residential property may secure a loan with a lower LTV than commercial properties, which might qualify for higher loan amounts. The higher the LTV, the greater the risk to the lender, and as a result, you may be charged a higher interest rate for loans with higher LTV ratios.
3. Exit Strategy
An essential feature of closed bridging loans is the presence of a defined exit strategy. Lenders want to ensure you can repay the loan by the agreed date, so they will want to know exactly how you plan to repay it once the term ends. This could include selling the property, refinancing with a traditional mortgage, or using proceeds from another investment.
The more solid and well-documented your exit strategy is, the higher the likelihood of securing the loan. If you are purchasing a property with the intention of reselling it, having a clear plan and timeline for the sale is crucial. Lenders may also ask for proof of any agreements already in place, such as an offer on the property or an agreed-upon sale date.
4. Income and Affordability
While income is less of a focus for bridging loan lenders than traditional mortgage lenders, it’s still a critical factor in qualifying for a closed bridging loan. Lenders will assess your ability to repay the loan, especially if you plan to use personal income to cover any shortfall between the loan amount and property sale proceeds. In cases where the loan is not solely reliant on the sale of a property, you may be asked to provide proof of income, such as pay slips or bank statements.
For those who are self-employed or have irregular income, lenders may require additional documentation to demonstrate the ability to meet the repayment schedule. In some cases, lenders may require a guarantor or co-signer, particularly if there are concerns about your ability to repay the loan on time.
5. The Type and Condition of the Property
Lenders will also consider the type and condition of the property you use as security for the loan. Properties that are easy to sell or have high market demand are often considered lower risk. In contrast, properties that may be harder to sell, such as those needing significant repairs or in less desirable locations, could result in a higher interest rate or lower loan offer.
Additionally, if the property is non-standard, such as a commercial or mixed-use property, this could also impact your eligibility. Sometimes, the lender may require a higher deposit or charge a premium on the interest rate to offset the perceived risk.
6. Experience and Track Record
If you are a property investor or developer, having a strong track record of successful property transactions can significantly improve your chances of securing a closed bridging loan. Lenders may be more willing to offer loans to individuals with experience in property deals, as they are seen as less risky. A proven history of buying and selling property can reassure the lender that you have the skills to navigate any issues that may arise and successfully exit the loan by the agreed-upon date.