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Closed vs. Open Bridging Loans – What’s the Difference?
When it comes to finding the best finance for you, it can be tricky to figure out what exactly it is you need. Even after you narrow it down to a certain loan type there are often several versions of it. One example of this is closed and open bridging loans; here are the key differences to help you out:
What is an Open Bridging Loan?
An open bridge is a short-term loan without a defined exit strategy or end date; it is open-ended.
What is a Closed Bridging Loan?
A closed bridge is a short-term loan with a defined exit strategy.
Open vs. Closed Bridging: What’s the Difference?
As you can see, there is one core element to a bridging loan which decides whether it is closed or open and that is whether or not the borrower has a clear, planned exit to repay the loan. If there is an exit strategy, then it is a closed bridging loan; if not then it will be open.
These exit strategies are generally things such as the sale of another property, the acquisition of a mortgage, or a planned payment date for another transaction. If you know for a fact that you will have the funds to pay off the loan and can prove this to the lender then they will give you the rates of a closed bridging loan.
Generally, they will require a very detailed exit plan, typically including a completion date, before they will be willing to provide the loan – the same is not true of open bridging loans.
Should I Choose an Open or Closed Bridging Loan?
You will find that closed bridging loans offer much better rates and are more likely to be accepted than their open counterparts.
Bridging loans are not supposed to be used as a long term finance solution – typically they have much higher rates and a max term of around 12 months. Because of this, the security of a closed bridging loan, where the lender knows you have a way of repaying the lump sum, is attractive and you are more likely to get a better deal.
Open loans will have higher rates, and while you may not need to have a clearly defined exit strategy, you do need to know how you expect to get the money you need to repay the loan. Unlike a typical mortgage, you cannot simply pay it off bit-by-bit every month, so think carefully before applying.
Open bridging loans are very common with borrowers who are relying on the sale of a property to generate the money they need to cover the loan.
Uses for a Bridging Loan
Both open and closed bridging loans are used for a variety of purposes. Most commonly, bridging is used to:
- Secure a property while waiting for existing property to sell
- Quickly secure a property in an auction
- Continue to purchase even if the buying-chain breaks
- Finance property refurbishments or developments needed prior to gaining a mortgage