Is it better to opt for open or closed bridging loans?

Thursday, 15 December 2011 02:48

There are different types of bridging loans

If you have come to the conclusion that bridging loans are the right option for you to complete your property development or secure a home purchase, the next step is to ascertain which type of bridging loan is the best way forward.

It is important you know all about bridging loans and the various pros and cons associated with each type before you proceed any further.

Taking advice on bridging loans from a qualified professional is a good way to learn about the advantages and disadvantages of the options available to you and to make an informed decision.

There are two main types of bridging loan you need to consider when weighing up your options – open bridge loans and closed bridge loans.

Open bridge loans

An open bridge loan is one where no guaranteed exit or repayment date has been arranged due to the circumstances surrounding a particular case.

Such a loan will come in useful if your house is yet to sell but you have found a new property you want to move to and do not want to miss out on it due to a lack of funds.

What an open bridge loan allows you to do is to purchase the desired property by releasing the equity in your existing house for a period of time.

Eventually, once your current home sells, you will be able to pay back the bridge loan.

The advantages with open bridge loans include the fact that the money can be arranged quickly, meaning that you will not miss out on the property you have set your heart on.

In addition, these products are more flexible in that you do not have a certain date by which the money has to be repaid, which could come in useful if you are unsure when your property is likely to sell.

While such finance can be obtained relatively quickly, an open bridge loan exposes the lender to a greater degree of risk.

This means you are likely to incur higher interest rates than you would with alternative products, meaning the sum you repay could be significantly higher than you first planned

if your home does not sell in the immediate future.

Closed bridge loans

A closed bridging loan works in the opposite way to an open one.

This kind of lending will usually have a completion date stipulated at the beginning by which time it must be paid back in full.

While an open bridge loan is used to secure a property while you wait for yours to sell, a closed bridge is normally taken out when the sale chain is nearing completion.

If contracts have been exchanged on your existing home but the deal will not be completed before a particular date, you could risk losing the property you were hoping to move to as a result.

In this instance, a closed bridge loan can give you the funds to complete your purchase.

As closed bridges expose lenders to less risk, the interest rates charged are usually lower. Many lenders are happy to provide funds after contracts are exchanged as few deals collapse once they have reached this stage.

The downside is that should the transaction fall through for any reason, you will have to repay the money in full by the date specified, which could prove problematic if you do not have the finances in place.

As with all loans, seeking the advice of a qualified professional will ensure you are aware of all the advantages and disadvantages associated with bridging loans and which option represents the best way forward.

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