Over the years, bridging loan has gained immense popularity as one of the best ways to arrange short-term finances. Bridging finance may seem easy to acquire, but it comes in a range of shapes and sizes that may put you in a dilemma. However, all loans fall into one of two categories – open and closed bridging loan. Before we discuss what is an open and closed loan, it is essential to understand different situations where bridging loans are the most suitable option.
Open vs. Closed Bridging Loans: Understanding the Key Differences
A bridging finance can help you bridge the financial gap between raising the funds and funds being made available in situations, such as:
• You are waiting for the sale of your property, but need access to the funds to buy a new property.
• You wish to buy a property quickly while you wait for the mortgage to get approved to pay off the bridging loan.
• You want to refurbish or redevelop the property while waiting for the mortgage.
• You want to obtain funds quickly to complete a property sale through auction.
• You see incredible business opportunities and cannot afford to miss one due to lack of finances.
The most important thing to remember if you are planning to use a bridging loan is:
• Be aware that a bridging loan is a short-term and high-interest loan
• Have a solid plan on how you will arrange finance to repay the bridging loan
Borrowers find themselves in trouble when they take out a bridging loan without being certain of the terms associated with it. Hence, let’s first understand what is open and closed bridging loans.
What is Open Bridging Loan?
An open bridging loan is generally used when borrowers are not sure about when their financial situation will change and when they will repay the loan. However, in most cases, the open bridging loan is repaid within 12 months. Since there is no fixed end date, the interest rates of open bridging loans are higher than those of closed bridging loans.
Open bridging loans are extensively used when there is a perfect property investment opportunity, but your current property is not sold yet. You can get open bridging finance to seize the opportunity and repay the loan whenever your existing property is sold.
What is a Closed Bridging Loan?
On the contrary, a closed bridging loan requires a pre-defined deadline and a proper repayment plan. When you choose a closed bridging loan, you need to specify when you plan to repay the money and how you are going to repay it. Closed bridging loans have lower interest rates because, with a pre-determined exit plan, there is less risk of the borrower being not able to repay the loan.
A closed bridging loan is advisable when you have a firm idea of how you will repay the loan. Whether through property sale or inheritance money, you need to present a clear exit strategy in order to be qualified for the closed bridging loan.
Open vs. Closed Bridging Loan – How They Are Different from Each Other?
The major difference between open and closed bridging loans is whether or not the borrower has a planned, clear exit strategy to repay the loan. If the borrower has a fixed repayment date, then it is a closed bridging loan. If not, then it is open.
You will be offered a closed bridging loan if you have initiated a property sale, but the sale has not completed yet. The bridging finance will enable you to buy your new home while the sale of the existing home is still going through. Therefore, your bridging loan lender knows beforehand how you are going to repay the loan and set a definite end date known to be ‘closed’.
If you haven’t exchanged contracts or sold your property yet, you will be offered an open bridging loan. There is no specific end date, but this type of loan is usually paid back within a year. You will need to provide assurance to your lender regarding how you plan to repay the loan. The lender may ask for evidence, including what steps you are taking to repay the loan, details of the new property you are willing to purchase, equity from the sale of your current home and so on.
Closed vs. Open Bridging Loans – Which is the Best for You?
Both open and closed bridging loans are designed to bridge the short-term finance needs. Choosing the right bridging loan depends on your circumstances and how you plan to repay the loan. Now that you know what is open and closed bridging loans, let’s take a quick look at their advantages and disadvantages.
Advantages of Open Bridging Loan:
• Flexible repayment date without any heavy penalties
• Ideal in circumstances when you don’t know when your existing property will be sold
Disadvantages of Open Bridging Loan:
• Harder to acquire as lenders can ask for more evidence on how you will repay the loan
• Higher interest rates as there is no certainty of the repayment date.
Advantages of Closed Bridging Loan:
• Lower interest rate because of the certainty of the repayment date
• Higher acceptance rate as the lender has clarity of the repayment date
Disadvantages of Closed Bridging Loans:
• If you miss your repayment date, there could be significant penalties
• You need to show a clear exit strategy along with a confirmed end date for your application to be accepted
Both bridging loans have their own pros and cons. Therefore, the best bridging loan for you depends on your present financial position, the purpose of acquiring the bridging loan and how you plan to repay the loan. Choose a closed bridging loan if you are certain that the funds will be available to you within a specific date, be it from the sale of your property or inheritance. But, if you cannot decide upon a specific repayment date, an open bridging loan is a better choice here.
Keep in mind that regardless of the bridging finance you choose, all lenders will charge penalties, ranging from 1% extra to much more, if you fail to repay the loan amount within the committed time frame. Hence, having a clear exit strategy is a must before you apply for any type of loan. As a specialist bridging loan provider in the UK, BridgingFinance4U offers the very best advice on which type of loan you should acquire by assessing your particular requirements and exit strategy. Get in touch with us today for a no-obligation chat if you are planning to take out a bridging loan. Click to Blog