What is a Closed Bridging Loan?
A closed bridging loan is where the exit strategy for the loan is clear from the outset. This means the lender knows exactly how you will repay the loan at the end of the term.
An example would be an application where you are planning to refinance with a new lender to repay the loan and you have a full offer of finance in place.
There are a number of acceptable repayment strategies for a loan to be considered closed, such as:
- Sale of property
- Funds you are waiting to arrive
The key is, the bridging loan lender will be keen to ensure the funds are definitely going to arrive, with a date already set out.
Due to the reduced risk, lenders are likely to offer lower interest rates for closed bridging loans, and may be more comfortable lending, meaning the application process is more straightforward.
What is an Open Bridging Loan?
An open bridging loan is, as mentioned above, a term of short-term finance secured against property or land. Where it differs from a closed bridging loan is that there generally wouldn’t be a specific exit strategy in place, or the strategy has no set date.
An example of an exit strategy that would lead to an open bridging loan would be where the sale of the property will repay the loan, but the property is not yet on the market.
The key distinction is that there is no guarantee of receiving an offer, when an offer is likely to happen, or how much the offer would be. As such, this makes the transaction inherently riskier than it would be if an offer has been made, a completion date set, or even if there were already offers on the table.
While open bridging loans are slightly more flexible, they can be slightly trickier to apply for as the lender will be keen to understand how repayment will happen.