What’s The Difference Between
Open and Closed Bridging Loans?
When it comes to bridging loans, open and closed are amongst the most common types. But what is the difference between the two? This guide will explore open and closed bridging loans to help you decide which will be best for you.
Types Of Bridging Loans Available
A bridging loan is one way to obtain a short-term loan to bridge a temporary gap in your finances. As well as domestic bridging loans, a large bridging loan for commercial applications can also be sourced using an expert broker such as Finbri.
Whether large or small, bridging loans are available in two types – open and closed.
An open-ended bridge loan does not have an end date or exit strategy, while a closed bridge loan has an agreed end date and an exit strategy that outlines exactly how you will repay it.
The Key Differences Between Open and Closed Bridging Loans
The significant difference between an open and closed bridging loan is whether there is a clear repayment plan, also known as an exit strategy.
An exit strategy is required for a closed bridging loan, which also requires you to have the cash to pay off the loan by the agreed date. This cash is generally from the sale of a property or funds that are due to you, and the lender will require evidence. However, as this form of bridge loan is more secure for the lender, the interest rates tend to be more favorable than an open type of bridge finance.
There is no requirement for an in-depth exit strategy or payment deadline with an open bridge loan – it is open-ended – but most open bridge loans tend to be paid off within a year. You will, however, need to show the lender how you intend to pay the loan off – for example, what you are doing to sell your current property or details of your plan for refinancing.
As an open bridge loan is not as secure for the lender as the closed type, the interest rates are typically higher. For both types of loans, you should also account for any set-up fees to be sure you will be able to pay back the total amount owed.
Making The Right Choice
The most popular reasons for applying for a bridging loan are to:
- Buy a new property while you are waiting for the sale of your existing one to go through
- Maintain the purchase of a property even if there is a break in the sale chain
- Fund the renovation or development of a property before you can obtain a mortgage
- Purchase a property quickly at auction, so you have the time to obtain a longer-term mortgage
Whether you opt for an open or closed bridging loan, taking out finance is an important decision that requires careful consideration. So, before progressing with an application, you should always speak to a specialist bridging loan adviser who will discuss all the options in detail with you.