Bridging finance offers 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 two different options to choose from when taking on a bridging finance loan.
Deciding whether you want to use an open bridging finance or a closed bridging finance 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.
However….
Depending on the stage you are at with buying your new property and selling your existing property, you may not have any choice as to whether you can use open or closed bridging finance.
What is Closed Bridging Finance?
Closed bridging is 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 bridging finance. When a concrete repayment date is decided and agreed upon, the financial product used is known as closed bridging finance.
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.
What is Open Bridging Finance?
Open bridging, on the other hand, is 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, timing differences between the settlement of new and old properties, to mortgage providers who drag their heels.
In such cases, it’s possible for borrowers to use open bridging finance 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 finance 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 finance is the right product for you? Discuss your individual circumstances in confidence, with no obligation, with your Mortgage Adviser.
Please reach out through the contact page or contact me directly on 0272 751 555.