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Bridging loans offer a fast way to find finance which “bridges the gap” between the sale of your old property and the purchase of a new property. The product itself is relatively straightforward; however, there are a few different options to choose from when taking on a bridging loan.
Deciding whether you want to use an open bridging loan or a closed bridging loan is one choice you’ll need to consider, as it will have an impact on both your repayments and the level of interest you are charged.
What are closed bridging loans?
Bridging loans are used exclusively when borrowers face a short-term need for finance, “tiding them over” until a better source of long-term finance becomes available. Typically, this source will stem from the sale of an old property or the completion of a mortgage agreement on a new property.
For some borrowers, it is possible to know precisely when these funds will become available. Some people will have a completion date set in stone on an old property, others will know exactly when their mortgage will be agreed. In these cases, it’s possible to set a fixed date for the repayment of a bridging loan. When a concrete repayment date is decided and agreed upon, the financial product used is known as a closed bridging loan.
Closed bridging loans often carry lower rates of interest and are more likely to be accepted by lenders, compared to open bridging loans which we will discuss below. That’s because closed bridging loans give lenders a greater degree of certainty and confidence in the repayment. If borrowers do not meet the terms which have been agreed as part of a closed bridging loan, however, the financial penalties can be very serious.
What are open bridging loans?
Open bridging loans, on the other hand, are used by borrowers who are not certain about when their expected future finance (from the selling of a property or agreement of a mortgage) will become available. This situation may occur for many reasons, from legal hold-ups with the sale of a house, to mortgage providers who drag their heels.
In such cases, it’s possible for borrowers to use an open bridging loan which doesn’t have a set repayment date. This allows borrowers more flexibility and ensures they avoid substantial penalties if circumstances prevent them from meeting set terms.
While open bridging loans are more flexible, they are also more expensive. Because of the additional uncertainty regarding repayment, lenders usually apply higher rates of interest to cover the potential risk. They are also rarer. Lenders are typically less willing to provide open bridging loans as they carry more risk. Borrowers will need to do more to prove that they will be able to repay in the near future to be granted a loan of this type.
Not sure whether an open or closed bridging loan is the right product for you? Discuss your individual circumstances in confidence, with no obligation, with our experienced team. Contact Just Mortgage Brokers today.