In finance, bridging loans are a popular solution for those needing quick funding, especially when timing is crucial. Whether you’re a property investor or someone looking to make a time-sensitive purchase, bridging loans can provide the necessary capital. However, there are different types of bridging loans and understanding the difference between them is essential.
What Is a Closed Bridging Loan?
A closed bridging loan is a type of short-term loan used to “bridge the gap” between purchasing a new property and selling an existing one. Unlike traditional loans, bridging loans are typically used when time is of the essence. A closed bridging loan is characterised by its certainty of repayment; it has a fixed repayment date agreed upon in advance. This means that the borrower and lender know exactly when the loan is expected to be repaid.
Closed bridging loans are often used in property transactions, such as when someone is purchasing a new property but has not yet sold their current one. These loans are typically secured against the property, and the borrower is expected to repay the loan within a short period—usually between one and twelve months. The loan will be paid back either by selling the existing property or through another pre-arranged source of funds.
How Does a Closed Bridging Loan Work?
The loan structure is straightforward when you take out a closed bridging loan. Here’s a step-by-step breakdown of how it works:
- Application and Approval: You apply for a bridging loan with a lender, providing information about the property or project you’re funding. This can include details of the property you’re buying, your selling, and your financial situation. The lender will assess the loan application, including your ability to repay the loan.
- Loan Agreement: Once approved, you and the lender agree on the loan terms. This includes the loan amount, interest rates, fees, and, importantly, the repayment date. The repayment date is fixed, meaning the loan must be repaid by a specific date, usually when your current property is sold.
- Fund Disbursement: Once the terms are agreed upon, the lender will disburse the funds to you. You can then use this money for the property purchase or the project you’re funding.
- Repayment: At the end of the agreed term, you must repay the full loan amount plus any interest and fees. The repayment is usually made by selling your existing property. If the sale doesn’t happen in time, the lender may expect other means of repayment.
- Completion: Once the loan is repaid, the lender releases their charge on the property, and the loan agreement ends.
Features of a Closed Bridging Loan
- Fixed Repayment Date: The defining feature of a closed bridging loan is the fixed repayment date. This gives the borrower and the lender certainty about when the loan will be paid back.
- Short-Term: These loans are typically designed for short-term borrowing, with terms ranging from one month to twelve months.
- Secured Loan: Most bridging loans, including closed bridging loans, are secured against the purchased property or the borrower’s existing property. This means the lender can repossess the property if the loan is not repaid.
- Higher Interest Rates: Like most bridging loans, closed bridging loans usually have higher interest rates than traditional mortgages. This reflects the short-term nature and the risks involved.
Closed Bridging Loan vs. Open Bridging Loan
Although both closed and open bridging loans are used for similar purposes, they differ significantly in one key aspect: the repayment schedule.
- Closed Bridging Loan: As mentioned earlier, a closed bridging loan has a fixed repayment date. This makes it a more predictable and secure option for borrowers and lenders. You know exactly when the loan is due to be repaid, which helps you plan your finances.
- Open Bridging Loan: On the other hand, an open bridging loan does not have a fixed repayment date. While the loan term is still typically short, the borrower may not have a definitive date for repayment. This can make it more flexible but also more uncertain. In some cases, open bridging loans may be used when the borrower is unsure of when the property sale will happen but needs the funds urgently.
Advantages of Closed Bridging Loans
- Certainty: One of the primary advantages is the certainty it provides. Both the borrower and lender know exactly when the loan will be repaid, reducing the risk of confusion or missed payments.
- Speed: Like all bridging loans, closed bridging loans are quick to arrange. This speed can be incredibly helpful if you’re in a time-sensitive situation.
- Suitable for Property Purchases: Closed bridging loans are commonly used for property transactions, making them ideal for individuals or investors who need to move quickly in a property market.
Disadvantages of Closed Bridging Loans
- Higher Interest Rates: The interest rates on closed bridging loans are typically higher than those of traditional loans. While this may be acceptable for short-term borrowing, it can add up quickly.
- Risk of Repossession: Since closed bridging loans are secured loans, you risk losing your property if you are unable to repay the loan by the fixed date.