Differences between open and closed bridging loans

If you’re taking out a bridging loan there are two types to choose from. We look at how they work to help you decide which one is right for your circumstances.

Bridging loans are useful if you need money quickly to pay for something, such as property, or clear a debt when funds you expect to have in the future are not yet available or you’re not yet in a position to take out longer-term finance, such as a mortgage. They are short-term loans usually designed to be paid back within a year.

There are two types of bridging loan – open and closed. In a nutshell, a closed bridging loan has a set end date and requires a firm exit strategy (how you plan to pay off the loan) to be in place, while an open one doesn’t. Read on to find out more.

Situations you might need a bridging loan for include buying a new home before your old one has sold or buying a property at auction, as bridging loans can be arranged a lot faster than mortgages – usually within two weeks but sometimes even in days. You either make interest payments each month or pay the interest off when you repay the capital.

What is a closed bridging loan?

If you know what your exit strategy for the loan is and when you’ll be able to pay it back – for example you are selling a property or taking out a mortgage and know the completion date, or you are expecting inheritance money or funds from another source, such as an investment, to arrive – you can take out a closed bridging loan.

You’ll commit to a fixed date to repay it and there will be penalties if you don’t pay it back on time.

Closed bridging loans are generally cheaper than open ones because the lender has more certainty that they will get their money back and knows when it will happen. You’re more likely to be accepted for one and the application process is more straightforward.

The lender will want to see proof of your exit strategy.

Finder survey: What proportion of Brits understand what a bridging loan is?

ResponseFemaleMale
No49.4%37.5%
Yes, to some extent34.94%37.23%
Yes, fully15.66%25.27%
Source: Finder survey by Censuswide of 1032 Brits, December 2023

What is an open bridging loan?

On the other hand, if you don’t know when you’ll be able to pay back the loan, you can take out an open bridging loan. You might not know when you’ll put your property on the market or when it will sell, for example, or you might not know when your mortgage will complete.

An open bridging loan gives you flexibility in when you pay it back and you’re not at risk of having to pay hefty charges for repaying it late. You’ll still usually have to pay it back within 6 or 12 months and incur penalties if you don’t.

You may be able to pay off some or all of the interest before you pay off the capital at the end to reduce the overall interest costs.

As there is more uncertainty and risk for the lender with this type of bridging loan, they are more expensive and harder to come by. You will also have to go to greater lengths to prove that you will be able to repay the loan so the application process is likely to be more complicated.

Commercial open and closed bridging loans

You can take out an open or closed bridging loan whether you’re an individual or a business but commercial bridging loans are unregulated, as are all bridging loans not taken out on a property that will be your home or the home of your immediate family, so you’ll need to take extra care when looking at the terms of the loan.

Situations in which businesses may find bridging loans useful include moving premises before selling the old one and buying stock at peak times of year after a slow period.

Which type of bridging loan is right for you?

As the penalties for not paying back a closed bridging loan on time can be steep – additional interest of 1% or more – you should only take one out if you are certain of the timeframe of your exit strategy.

However, as open bridging loans are more expensive it’s worth working towards firming up your exit strategy so that you are in a position to take out a closed one and get a better deal. You’ll also have a bigger choice of lenders and an easier application process if you’re able to go for a closed bridging loan.

Speak to a specialist bridging finance broker to talk through your options and which one would suit you best. They can also look at all the available loans on the market to get you the best deal for your circumstances.

Pros and cons of closed versus open bridging loans

Pros

  • Lower interest rates
  • A wider choice of lenders
  • A more straightforward application process
  • More chance of being accepted

Cons

  • Penalties for not paying back the loan by the repayment date
  • No flexibility in when you can repay the loan
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