How much do you know about the loan options available to you as a mortgage applicant?
For starters, many versions of mortgage loans are available, but each may have something unique about it.
It can be somewhat overwhelming if you’re new to loans.
It may seem like you’ve narrowed your loan options to one viable seeming product only to discover that there are different variations of the same product.
One case where this happens, and where it can become quite confusing is bridging loans that come in two distinctive variations:
- Closed bridging loans.
- Open bridging loans.
What’s the Difference Between a Closed Bridging Loan and an Open Bridging Loan?
First, let’s nail down the most obvious differences between closed and open bridging loans.
Closed bridging loans are short-term loans with defined exit strategies, whereas open bridging loans are short-term loans without an end date or exit strategy.
In other words, open bridging loans have no end date.
The major difference between these two versions of bridging loans is whether or not the borrower has to follow a clear, planned-out strategy for paying the loan.
Exit strategies are general strategies that transition the loan at a certain period.
This could be selling another property, getting a new mortgage or another transaction planned for a future date.
If you know you have the finances and can afford to pay off the loan by a certain date, you will probably end up with a closed bridging loan.
An exit plan for a closed loan must include a clear exit strategy that includes the date the loan will be completed. Open bridging loans are quite different.
What Can I Use a Bridging Loan For?
There are many reasons why borrowers opt to apply for closed and open bridging loans.
While every borrower is unique, some common reasons for bridging loans are obtained.
These include the following:
- You can use a bridging loan to secure your next property while waiting for your current property to sell.
- Bridging loans can be used to secure auction properties.
- Proceed with a purchase even if there’s a break in the buying chain.
- Fund the carrying out of developments and refurbishments a property needs before a mortgage can be obtained.
- Expanding an existing property portfolio as a landlord.
Who is Eligible for Mortgage Bridging Loans?
No one can just apply for a loan on a whim.
You need to ensure that you have the correct documentation available and meet the eligibility requirements.
Are you eligible to apply for bridging loans?
You may well be! Below are some of the eligibility requirements:
- You must be a partnership, limited company or private individual to apply.
- You can still apply if you are retired, self-employed or traditionally employed.
- Minimum age to apply is 18 years old, although some lenders have higher age limits.
- Have a registered UK address.
- Applicants must have a defined exit route. For instance, you plan to refinance a loan or sell the property.
- You must be purchasing or refurbishing the commercial or residential property.
- You should have some form of security for the loan.
- Borrowers should be requesting a minimum of £10,000.
Keep in mind that these are generalised eligibility requirements, and they can change at any time without notice.
So it’s always a good idea to check the requirements before you start and potentially waste your time.
That said, it is best to work with a mortgage broker with a finger on the pulse of all things bridging loans.
This means they know the latest industry standards, where to find the best bridging cash deals and the latest eligibility requirements.
Which Loan is the Better Choice? Open Bridging Loans or Closed Bridging Loans?
When choosing the right bridging loan for you, you may wonder if it’s better to go with an open bridging loan or a closed bridging loan.
Understanding them a bit more might help you make an informed decision.
Regarding better rates and easier approvals, closed loans win first prize.
In addition, because there is a defined exit strategy in place, these loans are considered simpler to get than when compared with open-ended bridging loans.
The thing about bridging loans is that they are designed to be short-term loans, not long-term solutions.
The interest rates on bridging loans are typically much higher than regular loans, and they don’t usually extend past 12 months.
If you can prove to the lender that you can pay the loan off in the prescribed time, you’re likely to get approved and, of course, be offered favourable terms.
If you think that closed bridging loans have a high-interest rate, open bridging loans have an even higher interest rate.
There may be no definitive exit strategy, but the lender will still want to know how you plan to raise funds to repay the loan.
These loans cannot be paid off in little bits each month.
An example of this type of loan is an open loan applied for by a borrower who plans to sell the property to raise funds to repay the loan.
Closed vs Open Bridging Loans Last Word
When trying to decide whether open or closed bridging loans are for you, take the time to consider what your actual plan is for the loan.
For example, do you have a defined exit strategy or wish to have a more open-ended situation?
Check if you meet the general eligibility criteria, and then take the time to consult with a professional mortgage broker who can advise you on the correct course of action.