An open bridging loan has no fixed repayment date, but is still a short-term loan that must be repaid before the loan period ends. A closed bringing loan, on the other hand, has a clear repayment date.
The advantages of closed bridging finance
If you know when funds will be available to repay the bridging loan, closed bridging finance is appropriate. The main reason to take out a closed bridging loan is to save money, as interest rates for closed loans are generally lower than open bridging loans. Lenders feel that a fixed payment date provides a sense of certainty and the loan is regarded as a lower risk than open bridging finance.
A typical case where a closed bridging loan is better is when you are buying a house, but need the funds from the sale of an existing house to provide some or all of the money for the new house. If you have a buyer for your house and a firm completion date, you can apply for a closed bridging loan so that you can complete the purchase of the new home and move in before the existing house has been sold. Because you know precisely when funds will be available to repay the loan, a closed bridging loan makes sense.
Bridging loan interest is paid for the duration of the loan. If you do not know the date when you can repay the loan, then you cannot calculate exactly how much interest you will pay on the loan. With a closed bridging loan, interest is paid from the day funds are available to the fixed repayment date. This makes it easy to calculate precisely how much the loan will cost you in interest.
The disadvantages of a closed building loan
The main disadvantage of closed bridging finance is not being able to repay the loan by the repayment date. If the loan is for a property deal, there could be delays, even if you do have a buyer committed to a completion date. If you miss the repayment date you will probably be charged penalty fees as well as extra interest.
Bridging loans for business
Bridging finance is not just for individuals; businesses can use a bridging loan to raise short-term capital to buy stock, equipment or provide working capital during temporary low cash flow periods. Most of these uses will require open bridging loans.
When purchasing commercial property, a company has to pay the VAT on the purchase price. They will be able to reclaim the VAT back with their next VAT return. A closed bridging loan can be used to pay the VAT until the date when it is reimbursed.
For both open and closed bridging finance, you may repay the loan early.
How to decide if a closed bridging loan is best for you
If you are unsure what is best for you out of open or closed bridging finance, talk to Ascot Mortgages. One of our bridging loan experts will discuss your loan application and advise you if closed bridging finance is better for your individual financial needs.