Looking for the right financing option for your circumstances can be a complex task. Even when you manage to identify the best product type, you might still face several options. For example, if you are considering a bridging loan, you’ll find there are two fundamental options: open bridging loans or a closed bridging loan.
At first glance, you might wonder what the difference is and if one is better than the other. Which option you choose will largely depend on your requirements and current circumstances. To help you differentiate between these two products, we’ve put together this handy article to help you understand the key differences between the two and identify which product is better for you.
What is an Open Bridging Loan or Closed Bridging Loan?
The demand for bridging loans is on the up. In Q1 of this year, the industry saw an impressive 8.5% increase in uptake compared to the same time last year. So before we can get into the key differences between these two products, let’s first define what they are and how they work. We know that a bridging loan is designed to bridge the financial gap between buying a new property and selling an old one. So let’s look at them separately to define what each product offers and when they should be used. If you want to learn more about how bridging loans work, how they are used, and why someone might need one, check out our 2022 guide to bridging loans in Ireland to find out everything you need to know.
Open Bridging Loan
An open bridging loan is the best route for a borrower who is unsure when their financial situation will change and allow them to repay the bridging loan. An example of this is where their property has sold subject to contracts, but they are not yet sure when their mortgage funds will be released or where their existing property is still on the market, awaiting an offer but is expected to sell in the near future.
Although an open bridging loan has no fixed end date, a loan term within which the loan must be repaid is always set before approval. A typical open bridging loan will be issued with a term of twelve months. However, this is variable, and all bridging loans are issued on a case-by-case basis.
Benefits of an open bridging loan
- More flexibility on the repayment without the considerable penalties that come with missing a closed bridge repayment date.
Disadvantages of an open bridging loan
- Higher interest rates because the lender doesn’t have certainty over the repayment date due to the flexible payment nature of the product.
- It can be harder to secure due to the uncertainty over repayment terms.
Closed Bridging Loan
A closed bridging loan is offered to borrowers who know precisely when they will be able to repay the loan. For example, if you have a confirmed date for your mortgage funds to be released or the completion of your property sale, a repayment date can be set and agreed upon. In this case, all parties know when the bridging loan will be repaid, meaning the loan has a defined exit strategy.
Benefits of a closed bridging loan
- You are more likely to attract a better interest rate because you can guarantee when repayment will be made.
- A higher acceptance rate gives you a lower risk profile than a borrower with an open-ended loan.
Disadvantages of closed bridging loans
- If your exit strategy doesn’t go to plan and your repayment is delayed, you could incur significant penalties depending on the lender’s terms and conditions.
Closed vs Open Bridging Loan? What’s the difference?
As you can see, the main difference between a closed and an open bridging loan is whether the borrower has a defined exit strategy. When a bridging loan is required, and the borrower knows precisely when and how the loan will be repaid, a closed bridging loan can be offered.
Closed bridging loans are usually offered for around six months.
However, when it comes to property, it can be challenging to know exactly when a sale will be complete and allow mortgage funds to become available, so for many borrowers, an open bridging loan offers them greater flexibility in case there are any delays during the purchase process.
Regardless of which product you choose, you must have a clear exit strategy to demonstrate your ability to repay the bridging loan at the end of the agreed term.
Which Type of Bridging Loan is Best?
Bridging loans should only be used as a short-term solution whilst you secure a longer-term finance product for your residential or commercial property purchase. Typically, a closed bridging loan will have more favourable interest rates because a lender will know exactly how and when the bridging loan will be repaid.
An open bridging loan offers a greater level of flexibility but, like a closed loan, should only be used as a short-term finance solution to bridge the financial gap. This means you still need to have a confirmed exit strategy. Even if the end date cannot be confirmed upfront, the lender will expect you to repay the loan within twelve to eighteen months, depending on your situation.
Open bridging loans are more common when a borrower is reliant on the sale of another property to fulfill the loan repayment.
This makes it challenging to define which product is best. A closed loan is best for those who know exactly when the loan will be repaid to avoid penalties for late payments.
Open loans are better for the majority of house purchases where you have the means to repay the loan but cannot give a definitive date. If you are struggling to decide which would be best for your circumstances, we recommend speaking to a bridging loan expert or financial advisor before making a commitment.
How do I apply for an Open or Closed Bridging Loan?
You can apply for an open or closed bridging loan through a number of specialist lenders, including Novellus. The lender will need to know what the loan will be used for and what form of security you have. In most cases, this will be the property you already own or the one you intend to purchase with the bridging loan.
You’ll also need to provide a clear exit strategy to agree on when and how the loan will be repaid. At this stage, both you and your lender can discuss whether an open or closed bridging loan would suit your circumstances best.
As with all financial products, you will need to undergo a credit check in order to secure a bridging loan. For more information on applying for a bridging loan and how the application process works, don’t forget to check out our guide here.
If you are considering applying for a bridging loan as a short-term solution to facilitate a property purchase, whether you choose an open or closed bridging loan will depend on your current circumstances and exit strategy. We recommend that borrowers always consult with someone who can offer advice and guidance on the best product for their situation.
Contact our team for a callback and no obligation chat to learn more about bridging loans from Novellus.