Bridging loans are beneficial tools in property development. You can use it in many situations, especially when high street lending is unavailable or needs to be organized on time to close an important deal. When it comes to finding the right finance option for you, you may need help finding what you need. Even when you narrow it down to a certain loan type, several versions still exist. Open and closed bridging loans are one example of this.
Bridging lenders and p2p lending platforms offer a variety of loans, among which open bridging loans and closed bridging loans are two important distinctions.
You can choose the right option for yourself only when you understand their differences. Here in this article, we will describe everything you need to know about these bridging loans to make a better decision.
What Is An Open Bridging Loan?
An open bridging loan is suitable for those who need a clear exit strategy. Although you must repay the loan amount when it is due, you need to learn how to repay it. For example, you may think of repaying it by selling a property, but still, you are looking for a buyer or need to know the fixed date to complete the sale of the property.
In simple words, we can say that an open bridging loan does not have any fixed date to repay the loan. That is why lenders find this loan riskier and offer higher interest rates on them. You have to satisfy the lender so that you can repay the loan on time.
Typically, you are expected to pay back the loan amount within a period of six to twelve months, depending on the terms you choose at the start. You have to pay a penalty fee if you do not pay on time. However, you can repay the loan sooner, and most bridging lenders do not charge early repayment fees.
What Is A Second Charge Bridging Loan?
A closed bridging loan has a fixed end date and a clear exit strategy. If you want to repay the loan amount by the sale of your property and also know the completion date of the sale, then you can go for closed bridging finance. Alternatively, you may think of repaying the loan amount by some other means, such as inheritance money or a long-term mortgage, and you know the exact date when the transaction will be completed.
If you want to take out a closed loan, you have to show proof of how you will repay the loan amount.
Closed bridging loans come with lower interest rates than open bridging loans because of a defined exit strategy and firm end date. Lenders find that such loans have fewer risks as borrowers ensure that they are able to pay back loan amounts on time.
Open Vs Closed Bridging Loan
As you can see from the above discussion, there is one primary element to short-term bridging loans UK which decides whether it is open or closed, and that is the presence or absence of a clear and planned exit strategy. If there is a viable exit strategy, it is a closed bridging loan; if not, it is called an open bridging loan.
These exit strategies generally consist of the sale of a property, getting long-term financing such as a mortgage, or a planned payment date for another transaction. If you know the fact that you will have the funds to repay the loan amount and can prove it to the lender, then you will be able to get an affordable interest rate of a closed bridging loan.
Generally, lenders need a very detailed exit strategy that must include a completion date before they are willing to offer the loan amount. However, it is not true for an open bridging loan, and you can take out such a loan even when you need a clear exit plan.
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What Should You Choose An Open Or Closed Bridging Loan?
If you compare rates, you will find that closed bridging loans offer better interest rates and have more chances of approval than their open counterparts.
Bridging loans are short-term funding solutions, which is why they have much higher rates. The maximum loan term of bridging finance is around 12 months. Because of the security of a closed bridging loan, where the lender knows you can make a lump sum repayment, you are more likely to get a better deal.
Open loans have higher rates, and as you do not need to have a clear exit strategy, you will not know how you will get the money when the time comes to repay the loan. Unlike traditional mortgage loans, you can not pay it bit-by-bit each month, so be careful when taking out such a loan. Open bridging loans are common among borrowers who rely on the sale of the property to repay the loan amount.
Both open and closed bridging loans have their positive and negative sides, so you should always research to find which one goes best according to your requirements.
An open bridging loan does not have a firm end date, while the closed one has a fixed repayment date. You can choose the right one according to your circumstances. If you want quick access to funds and do not have any concerns with interest rates, you can go for a quick bridging loan. You can get such a loan even if you do not have a clear exit plan and fulfill your financial obligations on time.
However, if your main concern is the interest rate and you are looking for an affordable deal, you must have a viable exit strategy to get approval for a second charge bridging loan. Lenders find such loans more secure and offer lower interest rates than the open loans as borrowers ensure they can repay on time.
We hope this article will help you understand the difference between an open and closed bridging loan and making the right decision.