A bridging loan could be the ideal solution when considering applying for short-term finance. But how do you know which type of bridging loan is the best option?
Closed and open bridging loans are two of the most common types you can choose from. We explain how to tell the difference between the two.
Reasons to choose a bridging loan
A bridging loan is one way to bridge a short-term gap in your finances. Intended to be paid back over a shorter period of time than a standard loan, there are several reasons why bridging finance could be used, including:
- To buy a new property when you are still waiting to finalise a sale on your existing one
- To maintain a property sale, even if there’s a break in the buying chain
- To quickly obtain the finance you need to buy a property in an auction
- To buy and fund the refurbishment of a property before being approved for a standard, long-term mortgage
- To buy redevelopment land using a large bridging loan if planning permission has not yet been granted.
When applying for a bridging loan, two main types are available – closed and open. Here are the key differences between the two.
Open Bridging Loan
This is a loan which is open-ended, i.e., it has no set exit strategy or end date. However, most open bridge financing will typically clear within 12 months as a short-term loan.
- An open bridge loan will be offered if you have not yet exchanged or sold your property
- Interest rates on an open loan tend to be higher than closed bridge financing
- Your lender will require evidence as to how you intend to repay the loan, including details of the equity you should receive from the sale of your property and details of the new home you intend to buy
- They may also require details as to what you are currently doing to sell your existing property
Closed Bridge Loans
Unlike an open loan, a closed bridge arrangement will have a pre-agreed end date and an exit strategy that includes a clear repayment plan. Closed bridge loans are seen as more secure by lenders in terms of repayment.
- You will be offered a closed bridge loan if you have sold your property or have exchanged contracts
- They are typically paid back over 12 months, or less
- Interest rates on a closed bridge loan can be more competitive than an open bridge loan
- Your lender will know in advance how you intend to repay the loan by the ‘closed’ date agreed
Open or closed bridge finance – which one to choose?
The final bridge loan product you choose will be dependent on your circumstances and whether you have exchanged or completed on your current property or not. If you know you will have the finances to pay off the loan and can evidence it to your broker, you will be offered a closed bridge loan. They are also considered more secure by most lenders and can attract better interest rates.
If you are still in the process of selling your property and have not yet had a firm offer or exchanged, then you can still apply for a bridge loan to buy a new property, but it will be open-ended.
If you are in any doubt, a bridging loan specialist should be your first port of call before applying for bridging finance.