State and explain two types of bridging loan facilities

1. Closed Ended Bridge Loan
This means that the borrower has already identified buyer a buyer for the existing
property which is the main source of repayment of the advance. Its one where contracts
have been exchanged with a clear completion date on the sale of an existing property
which represents the key source of repayment. Since such contracts are legally binding
the lending risks are lower now provided a lawyers oath / undertaking is obtained to
ensure sale proceeds are received by the bank. Exchange of contracts does not however
guarantee that a sale will take place and problems can still arise in the full circumstances.
i) The buyer may not have the finance to complete the purchase. However, a
reputable lawyer cannot allow contacts to be exchanged if the necessary resources
to complete the contract are not available but it can happen. Close liaison with
the lawyer / advocate is essential indirectly through buyer’s lawyers. It’s also
becoming common for buyer to deposit 10% of the value of property to be
purchased as a show of commitment to purchase the property.
ii) Completion of the contract maybe conditional. For example the buyer might have
an option to withdraw from a purchase of property being built / improved if works
are not finished on time. Alternatively completion maybe dependent the buyer
having a mortgage.
iii) Although fixtures and fittings maybe forming a significant part of the purchase
price, they may not form part of lenders security if things go wrong. A full
valuation of the property should be taken and if significant be included as part of
security. However such valuation is not always taken in a bridging situation
particularly if bridging appears to be closed.
iv) Collision between buyer and seller, they might mutually agree not to go ahead
with the transaction in such a situation there is nothing a lender can do to ensure
the transaction go ahead in such circumstances and care should be taken when its
known that the buyer and seller are related.
v) Fees and finance costs.
NB: The safest course of action when in doubt completion will take place is to treat the
facility as an open ended bridge loan.
2 Open Ended Bridge Loan

This occurs especially where contacts regarding the sale of an existing property which
represent source of repayment have not been signed for the loan to be advanced to
purchase a new property. A lender should not consider an open ended bridge loan unless:-
i) The property market in question is a buoyant and it looks like staying that way in
immediate future.
ii) An early sale of the existing property is in prospect i.e. a definite buyer has been
found although contact have not been signed.
iii) There is a substantial margin to cover all contingencies. The expected net sale
proceed should be able to pay the loan plus twelve month accrued interest and at
the same time allow for 20% reduction in the asking price.

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sharon kalunda answered the question on March 7, 2019 at 14:06