Jessica Rodz March 6, 2025

The demand for bridging loans has recently gathered pace. They are short-term loans sought after by those who are urgently interested in investing in a new property and are waiting for their existing property to be sold. In other words, it bridges the financial gap between selling a property and buying a property. Bridging loans are suitable under the following circumstances:

  • If you need to access money to buy a new property and you are waiting for your existing property to be sold.
  • If you need a quick injection of cash to buy a property and are waiting to have approbated your mortgage application from your lender or bank.
  • If you want to buy an auctioned property and have to wait for some time to complete the sale of another property.
  • If you need to buy a property for your business purpose and you have to wait for some time to release sufficient cash.

Bridging loans furnish you with money when your current property is taking longer than expected time to be sold. Bridging loans are short-term loans and carry exorbitant interest rates. The repayment length of these loans does not last beyond a year. You will have to discharge the debt whether or not you manage to release equity by disposing of your current property. There are two types of bridging loans – open bridging loans and closed bridging loans.

What is an open bridging loan?

An open bridging loan is appropriate for those lenders who are not certain about the repayment timeframe. As you are dependent on your mortgage approval or the sale of the current property, in both circumstances, you might not be completely aware of when you would have access to money. It is one of the most flexible ways to finance your property. There will be no set date for repayment; however, you will still have a deadline for when you are to discharge the full debt.

Here are the features of open bridging loans:

  • One of the biggest advantages of open bridging loans is that you will have flexibility over the repayment date.
  • Because you have no certainty about cash arrangements, you will end up being charged high interest rates. Bridging loans are exorbitant compared to other loans, but open loans are subject to higher interest rates in relation to closed loans.
  • Not all direct lenders will feel inclined to approbate these kinds of loans because they are subject to uncertainty.
  • You must have a good credit report to receive approbation from your lender.

A bad credit rating does not preclude you from applying for these loans, but some research is a must.  A few direct lenders are out there who might help consider your application despite a bad credit rating. In order to avail yourself of the best bridging loans with bad credit, you should consult a broker. Make sure that the broker you choose is the whole of the market because they have a panel of the best lenders. They will thoroughly assess your application and decide which lender is best for your needs.

What is a closed bridging loan?

A closed bridging loan is ideal for those borrowers who are certain about the date by which they will have arranged money. When you know exactly when you will have funds, you will not struggle to discharge the debt. Here are the features of closed bridging loans:

  • Contrary to open bridging loans, closed bridging loans are much more affordable. They do not carry high interest rates.
  • The chances of being accepted by lenders are quite high because lenders know when funds will be released here. The default risk is relatively lower than open bridging loans.

Two factors that differentiate open bridging loans from closed ones

The following are the two factors that differentiate both types of loans:

  • Interest rates

Unlike closed bridging loans, open bridging loans carry higher interest rates because there is no set date for the repayment. The default risk is too high because your repaying capacity is uncertain.

If your current property is not sold out or your mortgage application is declined, you will end up paying off the whole of the debt from your other financial sources. You might find yourself owing a debt that is beyond your affordability. The consequence of defaults or missed payments could be far-reaching.

  • Wider availability

Most of the lenders on the market do not have a provision for open bridging loans because they are subject to high risks. If you are looking for a bridging loan, there is a high probability of being approved for a closed bridging loan.

Therefore, at the time of applying for these loans, you must ensure that you are certain about the equity release. If your credit rating is not so perfect, a broker could help you choose the perfect lender whose criteria match your needs.

Exit strategy

Many borrowers believe that open bridging loans do not need an exit strategy as there is no set repayment day, but this is a myth. Even though you cannot decide on a repayment date, you are supposed to inform your lender when exactly you will be able to discharge the debt. There must be some deadline offered by a lender. So, whether you take out an open bridging loan or a closed bridging loan, an exit strategy is a must.

What if a bridging loan is not approved?

If you are refused a bridging loan for any reason, you should consider alternatives. For instance, short-term loans from a direct lender could be employed to bridge the financial gap. However, if you need a large sum of money, consider options such as:

  • Business Finance
  • Second-charge mortgages
  • Property development loans

The final word

Bridging loans are available in two forms – open and closed. The former is riskier than the latter because they charge high interest rates. However, when it comes to repayments, they are more flexible than closed bridging loans. Regardless of the bridging loan you choose, you must have an exit strategy. It is enjoined that you carefully consider your overall financial situation so you do not end up borrowing more than your affordability.