The difference between open and closed bridging loans

Let's look at two different types of bridge finance solutions on offer - open and closed loans.

Recap - what is a bridging loan?

Bridge finance is a specialist short-term finance product designed to, quite literally, bridge the financial gap between selling a property and buying a new one. It is popular with various types of client and in situations that include:

• A client who is waiting for their own property to sell, but who needs to access the funding to buy their next property while they await the equity to be released from the sale.
• A client who wants to move quickly to buy a property while they wait for a mortgage to be approved to then pay off the short-term bridge loan.
• A client who wants to buy a house at property auction quickly, and again, wait on a property sale - or another form of equity release - to then clear the bridging loan
• A business which sees a fantastic new property opportunity and wants to move quickly to secure it, before tying up loose ends and selling another property to release the funds needed to pay off the bridging loan.

The crucial thing to remember if you are considering the use of bridge finance is that you must:

• Be aware of its features as a short-term and high-interest loan
• Have another source of finance shortly becoming available - such as equity released on the sale of another property or a mortgage arranged - to repay the bridging loan.

People can get into trouble if they take out a bridge loan without being certain that they will be able to access the necessary funds required to pay it off quickly - such as equity released from a sale or a mortgage arrangement which releases the necessary funds.

What is a closed bridge loan?

So we've talked about how this type of finance is designed to tide you over financially in the short-term. Some borrowers will know exactly when their funds will become available to pay off the bridge finance - such as when a sale will complete or when mortgage funds will be released.

When this happens, the date for bridge loan repayment can be set. When this is concrete and agreed upon contractually, the loan is called a closed loan.

The features of a closed bridge loan

When you are in a position to select a closed bridge loan you will find that:

• It tends to have a lower interest rate than an open bridge loan, because of the certainty of repayment built into the arrangement. 
• It is more likely to be accepted by a lender, who has greater certainty and clarity about the repayment date and who can build this into the risk profile of the loan.

Note, however, that if you cannot repay the bridge loan at the agreed date, the financial penalties can be substantial.

What is an open bridge loan?

The other type of bridging loan is an open one and this is the preferred route for borrowers who are not entirely sure as to when their financial situation will allow them to repay the loan, for example, when their other property will sell or when the mortgage funds will be released.

Open bridge loans have these features

• Flexibility over the repayment date - without any risk of heavy penalties that would be incurred if a closed bridge loan repayment date were missed.
• Higher interest rates, because the lender doesn't have the same certainty over the repayment date and instead offers the borrower greater flexibility.
• Greater difficulty in achieving acceptance for this type of loan because of the uncertainty of repayment.

Bear in mind that the higher interest rate is also applied because there is a risk of default with a bridge loan that has no expected repayment date. Borrowers who take this type of product out without really understanding the risks or checking that it is suitable for their situation can find themselves in trouble if things don't go to plan. The financial implications can be fairly onerous in this case, considering that this type of loan is designed to be short term and is expensive as a result. The worst case scenario could be finding yourself responsible for repaying a bridge loan that you cannot afford to repay because your property sale or mortgage hadn't gone through as expected.

Getting the advice that you need

Bridging finance solutions can be extremely valuable to borrowers in situations that require rapid access to money. The best bridging loans UK providers offer result in rapid access to finance so that a property deal can go through.

When used correctly and in line with the relevant bridging finance solutions terms and conditions, the value of this type of finance has been proven. However, things do go wrong when borrowers don't understand what they are signing up for.

It's usually wise to get expert advice from a qualified mortgage advisor who can assess your particular situation and make a recommendation based on it. Our team of friendly and helpful experts will talk to you to discuss your needs, build a picture of your financial situation and recommend whether a bridging loan or an alternative financial product will be appropriate.

Why not contact our expert team today for a no obligation chat about your circumstances and to find out more about how we can help.