If you are selling a property and preparing to move into a new one, or need short-term finance to complete on a property or development land, a bridging loan could be the solution you need. Here’s how to decide whether an open or closed type of this loan is the right option.
Open Vs Closed Bridging Loans
This loan is a route to short-term financing for a property, especially if you still have to sell your current one. It can also be used as an initial investment to purchase a redevelopment property or you are buying at auction. Meanwhile, a large commercial bridging loan could be a solution if you are waiting on planning permission for a piece of development land and can’t yet get a longer-term mortgage.
When it comes to the main bridging loan types, you can get them open or closed:
An open bridging loan is an open-ended arrangement with no formal exit strategy or end date, although they are usually paid off within 12 months.
A closed bridging loan is a short-term financial loan that has a pre-agreed exit strategy with an end date when the loan is paid off and effectively closed, generally within a year or less.
Deciding Between Open and Closed Bridging Loans
It is important to always seek professional advice from specialists when considering this finance as they can explain the main differences between open and closed loans.
You may choose an OPEN BRIDGE LOAN if:
- You have a property for sale but have not reached the exchange or completion stage but are still looking to buy a new property
- The buyer of your current property is stuck in a chain, and you have a new property you still want to exchange on
- You can provide your prospective loan provider evidence as to how you intend to pay off the bridge finance
When considering an open bridge loan, you also need to take into account that they tend to have higher interest rates than a closed finance arrangement. You may also be asked to show evidence of what you are doing to sell your current property.
Or you could decide on a CLOSED BRIDGING LOAN if:
- You have already sold your property or formally exchanged contract
- Know you will have the funds available from the property sale to pay back the bridging loan
- Are willing to agree to a formal exit strategy, payment plan and end date for the loan
As closed loans are considered more secure than the open type in terms of repayment, lenders are more likely to offer more competitive interest rates. However, your lender will need to know exactly how and when you intend to repay the loan in advance.
Always get the right advice before deciding
Your bridging finance specialist will be able to advise you on the pros and cons of both open and closed loans and the costs involved so you can confidently decide which type of this loan you should apply for.
