For short-term property finance, a bridging loan could be the perfect solution. But what are the different types of bridge loans on offer?
When considering funding options for property development or urgent financial needs, working with a Bridging Finance Broker can provide tailored solutions that traditional lenders might not offer. These professionals specialize in securing short-term loans quickly, ensuring that you can move forward with your project without unnecessary delays.
When we compare the best bridging loans and look at the 2 most common ones – closed and open – we begin to discover the difference between the 2 so we can help you decide which option would be right for you.
For short-term property finance, a bridging loan could be the perfect solution. But what are the different types of bridge loans on offer?
We compare the most common bridge loans – closed and open – to discover the difference and help you decide which option would be right for you.
What is a Bridging Loan?
Designed to be repaid over a short period – typically around 12 months – a bridging loan can be used for numerous situations, the most frequent being:
- To bridge the finance gap between buying a new property while selling your current one
- To be able to progress a property sale to completion, if the sale chain you are in breaks
- To fund property redevelopment or refurbishment while waiting for a mortgage
- To obtain fast bridging finance to buy a property that is for sale through an auction
Open Bridging Loan
This is an open-ended loan with no set end date or defined exit strategy. However, in most cases, open bridging loans are typically paid off within 12 months. Interest rates on open loans tend to be higher than closed bridge loans, and you need to know in advance how you intend to raise the money to repay the loan.
Closed Bridging Loan
Unlike an open bridge loan, a closed loan has a pre-agreed deadline and an associated repayment plan. Closed bridge loans are paid back over a short period of time (usually one year or less) and are seen by lenders as being more secure in terms of repayment. This means you should be able to get a better interest rate deal than open-type loans.
Open Vs Closed Bridging – the key differences
The immediate difference between open and closed bridging loans is whether the borrower has a set exit strategy to repay the whole loan amount. This exit strategy is a requirement of a closed loan but is not necessary for open bridge finance.
You will usually be offered a closed bridging loan if you have exchanged contracts on your property, but the sale has not yet progressed to completion. This loan enables you to buy your new property while the sale of your current property is still going through. As a result, your bridge loan lender knows in advance how you will repay your loan and sets an end date for the loan to be ‘closed’.
An open bridging loan will be offered as short-term finance if you have not yet exchanged or sold your property. There will be no defined end date, although open loans are generally paid back within a year. Your lender will require more evidence as to how you plan to repay the bridge loan, including steps you are taking to sell your property, equity from its sale, details of the new property you are planning to buy, and how much you plan to pay.
Which is best for you?
The bridging loan you choose will depend on your circumstances and your plan to repay the loan amount, as well as whether you have already sold your current property. And, as with all financial loans, you should get the very best advice from a relevant loan specialist such as Finbri, before you decide to apply.