What is an open-ended bridging loan?

Bridging finance can be used for a whole range of property investments so it’s helpful to know the types of bridging loans available.  In this article, we’re looking at open-ended bridging loans.

What is an open-ended bridging loan?

Bridging finance is a short-term loan that can be arranged to meet tight deadlines and used for properties that are ineligible for traditional lending.  They are used when a borrower plans to sell the asset (normally after adding some value via refurbishment and/or the planning process), or they know they will have funding shortly becoming available, such as equity release from a property sale or new mortgage.  It’s one of the most flexible types of property finance on the market and can be either closed or open-ended.  So exactly what is an open-ended bridging loan?

Simple bridging loans definition:

• An open-ended loan has no set date for repayment (though it will usually carry a deadline for when the loan must be repaid). 
• A closed bridge loan will have a set date for repayment, due to a confirmed liquidity event, such as another property or business being sold.

Crucial to any bridging loan is having a strong exit strategy that demonstrates how you will repay the loan – this plays a big part in successful loan approval.

The most typical exit strategies are:

• property sale – either the property on which the open bridging loan is secured or another property that is currently for sale, under offer or sold-subject-to-contract
• refinancing on a conventional mortgage – for example, bridging loans are often used for auction purchases with a 28-day completion period, but long-term mortgage arrangements won’t complete until some weeks later.  Or if refurbishments are completed to make a property habitable, it becomes eligible for a long-term mortgage.
• repayment via the sale of another asset

Bridging loans are used regularly in property investment, both when the property doesn’t qualify for mainstream lending or when it can’t be arranged in time for an unmissable investment opportunity.  So let’s take a closer look at the distinction between open and closed bridging loans.

What is the difference between the two loan types?

Closed bridging loans are generally cheaper, so it’s good to know, what is the difference between the two loan types? The difference purely comes down to whether the exit strategy is confirmed.

A closed bridging loan would be used when the borrower has a set date for completion on a property sale. For a lender, the key milestone is seeing that the purchase on the other property has exchanged contracts.

Such loans are typically used to bridge the gap between buying and selling property. They allow for a property purchase before completion of the sale. For example, you've accepted an offer on your house and contracts have been exchanged, but there is a delay to the sale completion. Closed bridge finance would be used if there is a contractually agreed completion date for the sale of their own home, but it’s after completion on their new home.

Closed bridging loan features:

• tend to have a lower interest rate than open bridge loans because of the certainty of repayment built into the agreement
• more likely to be approved because lenders have a clear repayment date, so the loan carries less risk.

An open bridging loan would be best suited to a borrower who knows how they want to repay the loan but is unclear of exactly when. Like when a borrower has a mortgage approved but does not know when the funds will clear, or if they have a property on the market, but no sale agreed.

Open bridging loan features:

• more flexibility but higher interest rates, and more difficulty in achieving application approval.

With the difference between the two loan types coming down to the exit strategy, it’s worth looking further into the features of an open-ended bridging loan.

Pros and cons of an open-ended bridging loan

The overwhelming majority of bridging loans are open-ended. Closed bridging loans are rare. But as with all property finance, there are pros and cons of an open-ended bridging loan, which have to be weighed up.

The negatives:

• cost – open bridging loans usually have higher interest rates because lenders perceive them as higher risk, and the longer the loan period, the more costs that will be incurred
• lower approval – because of the perceived higher risk to lenders, it’s more difficult to get an open bridging loan.  A specialist bridging loan broker will know how to navigate this and mitigate against having a somewhat smaller pool of available lenders.

The positives:

• penalty fees – not subject to the same penalties that a closed bridge loan would face if the repayment date were missed
• flexibility – you will not always know the exact completion date of a property sale, so having a loan that will be flexible enough to suit your situation can alleviate a lot of stress.  
• astute lenders – bridging finance is used extensively by property developers so specialist bridging lenders will have seen innumerable loan requests with pretty unusual circumstances.  Sometimes property sales and mortgages don’t go through as or when expected, and bridging loan lenders will understand this industry nuance.

These are the most significant pros and cons of an open-ended bridging loan which have to be taken into consideration when choosing what type of bridging finance is best for your project.

Should I Choose an Open or Closed Bridging Loan?

If you think bridging finance might be the right choice for your property investment, you’ll naturally be asking should I choose an open or closed bridging loan?

As mentioned, this will be determined for you by your circumstances.  If you can demonstrate a confirmed date for a property or other asset sale (such as a business) then the bridging loan would be closed.  Conversely, if you’re using bridging to finance a property renovation where you have a timescale for completing the work but no exact sale date, then open bridging would be the only option.

Currently, there are over one hundred bridging loan providers, so to get the best loan at the best price, speak to a specialist broker. They will know exactly which type of loan suits your circumstances and which lenders have appropriate eligibility criteria.

At Brickflow, getting a bridging loan couldn’t be easier.  We’ve harnessed the power of technology so brokers using our platform can compare loans from over sixty lenders in a matter of minutes, instantly sourcing the best deals.  Our software continually delivers up-to-date lending criteria, pricing and policy variations and new products.  If you’re ready to apply for a bridging loan, Brickflow allows it all to be done in a single application process, so time isn’t wasted duplicating information for separate lenders.

Before spending too much time thinking about whether you qualify for an open or closed bridging loan, register with Brickflow and search over 80 specialist property finance lenders instantly.  Alternatively, tell your broker about Brickflow, or contact us to be connected to one of the UK’s best brokers who are already using our incredible software.

If you’re a broker, register with Brickflow today, to have a DIP on your desk tomorrow.