If you are exploring your options for bridge finance, there is a lot to consider. And even when you have narrowed your choices down to a loan type, you will still need to decide whether it should be open or closed.
Your final choice will depend on how you intend to repay your bridging loan, so always get the right expert advice. But in the meantime, we aim to answer the question – open vs closed bridging loans: which is right for me?
Why take out a bridging loan?
Designed to be a short-term loan to bridge a gap in your finances, bridging loans can range from £26k for a residential property up to £250 million for a large commercial bridging loan. Amongst the most common reasons for making a bridging loan application are to buy or renovate a property, including purchasing a home at auction or buying a new home while waiting to sell your current property.
Open and closed bridging loans are amongst the most common types, with a closed loan requiring a defined repayment plan and exit strategy, which you do not need for the open-ended type.
Open vs Closed
The main distinction between these two bridging loan types is how and when you intend to settle the debt and if you already have the funds in place to do so.
With a closed bridging loan, your lender will expect you to know in advance how you will pay off the debt and have a clear exit strategy that will include the final repayment date. You will typically be offered this type of bridging loan if you have sold or have a property to sell or have alternative funds available. Your lender will require to see evidence of this funding when you submit your exit strategy, and, as the loan is secured, you should be offered a better interest rate than an open type of bridging loan.
On the other hand, an open-ended bridging loan does not require a formal exit strategy or agreed end date, although these types of loans are still classed as short-term and will be typically paid off in around 12 months. However, your lender will still need to know how you intend to raise the cash to clear the debt, for example, from the sale of a property or refinancing. Interest rates on an open bridge loan tend to be higher than the closed type.
Making the right choice
To choose which type of bridging loan is right for you, you will need to know your goals and how you intend to raise funds to repay the loan. If you already have a property that is progressing through a sale or have money due to you from alternative means, a closed type of bridging loan will be better.
However, if you still have a property to sell or intend to raise the money by refinancing but don’t yet have the funds available, then an open-ended loan is better suited.
For either bridging loan, you need to be sure you can raise the money to repay the loan in time and in full, including the associated interest and any arrangement fees. For this reason, it is strongly advised that you always seek advice from an experienced bridging loan specialist or broker such as Finbri, so you can be confident you are making the right choice.