There are two types of bridging finance: closed and open. Open bridging loans are short-term loans with no fixed repayment date. Closed bridging loans do have a fixed repayment date, so when should you go for the latter option?
Examples of when to use closed bridging finance
Typically, a closed bridging loan is used to raise the finance to complete the purchase of property while waiting for funds to be available from the sale of an existing house. If there is a buyer for the existing house and a completion date has been arranged, the date on which funds will be available to repay the bridging loan is known. A closed bridging loan may be appropriate for this situation.
Another situation where a closed bridging loan can be used is when a mortgage is being arranged for a property but the funds are not yet available. As long as the date when the mortgage funds are ready is known, a closed bridging loan can mean that the completion of the sale on the property can be conducted quickly.
Bridging loans are quick – an initial decision on the loan can be made in a matter of hours, with funds available within a day or two. This makes them ideal for raising money for a short time until a long-term mortgage is available.
Advantages and disadvantages
A major advantage of closed bridging finance is a lower rate of interest when compared to open bridging loans. An application for a closed bridging loan is more likely to be accepted than an open bridging loan because the lender knows when and how the loan will be repaid.
The main disadvantage of a closed bridging loan is that high penalties are charged if the borrower fails to complete the repayment on time. If the repayment date is dependent on the completion of the borrower’s existing house sale and that sale fails to complete, then this could prevent the repayment of the bridging loan.
An open bridging loan does not have a fixed repayment date, so is more flexible, but is still a short-term loan and does not replace the need for a mortgage when buying property. Although interest rates are higher than closed bridging loans, open bridging loans are not subject to penalties if an existing house sale is delayed. The longer the open loan lasts, the more interest will be payable.
A closed bridging loan can be repaid earlier than the prescribed date, and there will normally be no early repayment fees.
Should you choose a closed bridging loan?
If you need a bridging loan and have a clear repayment date, the lower interest rate of a closed loan could be suitable, so why not seek advice from Ascot Mortgages? We can look at your individual situation and discuss all your borrowing options, and together, we can decide on whether an open or a closed loan is the better option. We can then find a suitable bridging loan lender and arrange a competitive deal.