When approaching a lender for a bridging loan, you need to be clear about how you’re going to repay it. This is because bridging finance is given on a short-term basis, providing a financial solution to bridge the gap while you arrange your longer-term finances. Having the right bridging loan exit strategy can influence a lender’s decision, determining whether or not they approve your loan.
What is a bridging loan exit strategy?
A bridging loan is a type of specialist finance that gives you quick access to funds for your residential or commercial property transaction. It offers incredible flexibility in its uses that traditional lending isn’t usually suitable for. For example, buying an uninhabitable property, preventing a repossession, overcoming business cash flow issues, buying a property at auction, preventing bankruptcy, buying a property when you’ve been unable to sell your current one, dealing with probate issues and more.
These bridging loan uses all pose a certain level of risk to the lender. As well as that, bridging finance is a type of short-term loan, typically taken out for up to 12 months. You don’t make any monthly payments for your loan but repay it in one go at the end of the agreed term, along with the interest and fees.
As such, the lender needs to know how you intend to repay your loan, which is called your exit strategy. This needs to be a realistic repayment plan, satisfying the lender that their loan will be repaid when it’s due. Examples of exit strategies include refinancing to a long-term loan, selling the property or switching to development exit finance.
The importance of having a clear bridging loan exit strategy
Your exit strategy is key to securing a bridging loan. The stronger your exit strategy, the better your chances of being approved for a loan. It can also lead to being offered more favourable terms by the lender. If the lender’s not convinced that your exit strategy is good enough, however, you won’t be able to secure the funding you need. This is because they don’t want to deal with potential legal issues if you default on the loan.
The details of your exit strategy determine the level of risk you pose to the lender. This, in turn, impacts various aspects of your loan. For example, how much you can borrow, the loan-to-value (LTV) ratio and the interest rate payable. A more robust strategy shows the lender that you’ve allowed for unexpected issues and can meet financial commitments. It increases your credibility as a borrower and results in better terms for your bridging loan deal.
The main types of bridging loan exit strategies
There are different exit strategies for bridging loans and the one you choose will depend on your circumstances. You may even decide to combine some of the options. The main types of exit strategies to consider are detailed below.
Sale of the secured property
This is the most common exit strategy used. You may, for example, want to use a bridging loan to buy a fixer-upper at auction to flip. Not only can you use the sale proceeds to clear your bridging loan debt in one go but you’ll walk away with some profit, too. Or you may wish to use a bridging loan to buy a new home while you’re still trying to sell your existing one. When the sale goes through on your current home, you can repay the bridging loan in full.
Long-term finance
Refinancing to a mortgage is another popular exit strategy. Going back to our example of buying a property at auction, you can use a bridging loan to buy a property and meet the fast auction timescale. Then, you can refinance to a mortgage, whether that’s residential or commercial. That way, the mortgage repays the bridging loan and you can then repay the mortgage over a much longer term and at a cheaper rate.
This is a good option if you buy a bargain property at auction that you wish to rent out. The bridging loan ensures that you have the funds you need to buy the property ahead of the auction. This removes any completion timescale issues. Then, you can arrange a buy-to-let mortgage and keep your property as a long-term investment.
Development exit finance
If you’re getting close to the end of your project as a property developer, you can refinance your bridging loan with a specialist type of bridging loan called development exit finance. You’ll benefit from a lower interest rate and have more time to complete your project.
Sale of another property or other assets
Rather than selling the secured property, you may have another property that you prefer to sell to repay the loan. For example, you may have found your dream home but haven’t found a buyer for your existing home. You can use a bridging loan for the purchase so that you don’t risk losing it by being stuck in a property chain. The bridging loan is secured against this new property. You can then sell your existing home and use the sale proceeds to repay the bridging loan.
Another example of when this exit strategy may be preferred is if you’re a landlord and want to add a new property to your portfolio using a bridging loan. You can sell another property in your portfolio to repay the loan.
You may have other assets you prefer to use. These can be investments, such as shares and bonds, or other valuable assets. The liquidity of these assets is important as you need to ensure that you can sell them when needed and gain adequate funds to cover the loan repayment. Using your pension is also another option — you can use a tax-free lump sum to repay your bridging loan.
Inheritance
Another exit strategy that can be used is an inheritance. Probate can take a long time so this repayment strategy is more complicated. You need to account for the timescale, including possible delays, any legal concerns and potential tax implications. A bridging loan lender will need to see proof of the expected inheritance, such as the probate documents or confirmation from your solicitor.
What happens if you can’t repay your bridging loan?
No matter how meticulously you may have planned your exit strategy, unforeseen issues can crop up that leave you unable to repay your loan. Your circumstances may have changed, unexpected problems or delays may have occurred or there may have been a downturn in the property market. Whatever the reason, you need to let the lender know in advance so that there’s time to consider other options.
Alternative options
The lender may agree to grant you an extension on your loan, although this can depend on the reason for the delay in repaying it. Just be aware that if they agree to an extension, you’ll more than likely have to pay a higher interest rate or may incur additional fees. One way to try and avoid the possibility of needing longer to repay your loan is to take the bridging loan out for a longer term in the first place. If you then repay it earlier, you won’t usually have to pay interest for the remainder of the term.
If extending your term isn’t a possibility, the lender may consider a different repayment method. You may, for example, have another property that you can sell. Another option is to look at refinancing via another lender. As unexpected issues can and do occur, it’s best to have a contingency plan in place before you take out the bridging loan.
Repercussions
Whatever happens, it’s essential to be proactive and seek a solution rather than default on your loan. If you do, there can be significant repercussions, including:
- Financial penalties. The lender can impose fees for the overdue payment and a higher interest rate. These penalties can significantly increase how much you owe.
- Damage to your credit history. Any late payments or defaults are recorded on your credit file, with a negative impact on your rating. A lower credit score will affect your ability to be approved for future loans.
- Loss of the property. You risk losing the property you’ve used as security if it has to be repossessed by the lender.
- Legal action. The lender may have to take legal action against you to recover the funds needed to repay the loan. Legal fees can be very expensive and they will increase your already significant debt.
Get the best bridging finance solution for your needs
As specialists in bridging finance, we understand that every situation is unique and you need the right product to suit your circumstances and plans. We weigh up the different options, taking into account lenders’ criteria, fees, interest rates and loan terms. As a key part of your application, we go through your exit strategy with you to ensure its feasibility. With this in place and having prepared the necessary documentation, you can rely on a quick and smooth loan process. To arrange your tailored financial solution, give our bridging loan experts a call on 01322 907 000.