You may have decided that a bridging loan is the right finance option for your situation, but which type do you choose?
Open and closed bridging loans are two of the most common types of bridge finance.
Here’s what you need to know about open and closed bridging loans, including the main differences between the two, so you can make an informed decision.
Why you may need a bridging loan
A way to bridge a temporary gap in your finances, bridging loans can be used for a range of reasons, the most popular being:
- To help you secure the purchase of a new property while you are still waiting for the sale of your current one to complete.
- As a form of fast bridging finance when you need to purchase a property quickly, for example, at a property auction.
- To ensure the purchase of a property goes through, even if there is a break in the sales chain.
- For property renovations or developments which need to be completed before you can put a standard mortgage in place.
In all the above cases, you may be offered either an open or closed type of bridging loan.
An open bridge loan does not have a formally agreed end date or a set exit strategy to be paid off; it is an open-ended loan.
On the other hand, a closed bridging loan is a short-term loan with a pre-agreed exit strategy with a set end date to be repaid.
Open versus closed – the main differences you need to know
The defining difference between an open or closed bridge loan is whether the borrower has an exit strategy that is a clear and structured plan to pay the loan off.
With a closed bridging loan, this exit strategy is required before the lender can approve it, while it isn’t a requirement for an open form of bridging loan.
The deciding factor as to which type of loan is appropriate for your circumstances will include whether you have completed or sold your property or if you already have the funds in place to pay off the loan.
If you have – or will have – the cash to pay off the debt and can evidence this to your lender, you will be offered a closed bridging loan. However, they will require an exit strategy, including a date by which the loan will be fully repaid before the loan can be approved.
With an open bridging loan, you don’t have to have the funds in place, but you need to show how you intend to obtain them (e.g., from selling a property or refinancing).
Open types of bridging loans also don’t require a formal exit strategy, although most are expected to be paid within one year.
A specialist bridging loan broker will be able to advise you on your options.
In all the above cases, you may be offered either an open or closed type of bridging loan. In addition, if you have a property already you may look at a 2nd charge bridging loan which is a short-term lending product that is secured against a property that already has a mortgage outstanding. Similarly, this can be offered as either an open or closed type of bridging loan.
Which type of bridging loan to choose
With a closed bridging loan, your lender will have the security of an exit strategy and evidence that you have the means to pay back the loan, so will typically offer a more favorable interest rate than an open bridging loan.
However, interest rates tend to be considerably higher than a standard, long-term loan, even with a closed bridging loan.
Closed loans will also have a maximum duration for you to repay, generally around a year. This type of loan is more likely to be approved than the alternative open bridging loan.
As you are not required to produce an exit strategy for an open loan, the interest rates are typically higher than the closed type. You should also be confident that you can raise the funds required to repay the loan, which will usually be over a period of no longer than 12 months.
Due to these key differences, you must always seek the right expert advice before choosing to apply for either an open or closed type of bridging loan.