We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.
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?
| Response | Female | Male |
|---|---|---|
| No | 49.4% | 37.5% |
| Yes, to some extent | 34.94% | 37.23% |
| Yes, fully | 15.66% | 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
More guides on Finder
-
Hard money loans: Short-term finance in the UK
Learn everything you need to know about hard money loans – also known as bridging loans. Find out how they work, what they can be used for and their benefits and downsides.
-
100% bridging loans: How to get one
Read our in-depth guide to 100% bridging loans, including how bridging loans work, how to borrow 100% of the property’s value, how to get the best deal and the pros and cons.
-
Probate loans
We explain how probate loans can be a valuable tool for dealing with financial issues that can come up when dealing with someone’s estate.
-
Bridging loans with bad credit
In-depth guide to bridging loans if you have had credit problems in the past, including what lenders are willing to overlook and which are the most important factors.
-
Buying property at an auction with a mortgage
Complete guide to buying at auction with a mortgage. Find out which types of properties could be unmortgageable and how to get your finances in place before the auction.
-
Regulated vs unregulated bridging loans
In-depth guide to regulated bridging loans versus unregulated ones and their pros and cons. When is a bridging loan regulated and how does this affect your application?
-
Buying repossessed property
How to buy a repossessed property and what the risks and benefits are. Plus, where to look for properties, buying at auction and issues to look out for.
-
Property auctions: All you need to know about purchasing at auction
The complete guide to property auctions, including how the process works and the checks to make on the properties you want to bid on.
-
Short term mortgages: Discover if they are the right option
Discover if a short term mortgage is a right option for you depending on your circumstances.