Bridging loans are specialist finance arrangements that are used to borrow money for short periods only. They are always secured on a property (or multiple properties) and have terms of 3-12 months. Bridging loan lenders are extremely flexible and as long as the property provides good security you can borrow money for virtually any reason.
The traditional use would be when a property chain is broken and simultaneous sale and completions can’t be aligned. This flexible loan provides a ‘bridge’ so that you can move home even though you have not completed on your sale.
For experienced borrowers, bridging loans are the ‘go to’ solution for raising money quickly and efficiently. If your security is strong then loans are available even without a strong income position or a perfect credit report.
But they will all have one thing in common – they need to be fully repaid when the term ends.
When you apply for a bridging loan the lender will be most interested in your property and your exit strategy. This article looks at what an exit strategy is and how they work in conjunction with short term bridging finance.
You may also find these pages useful:
What is an exit strategy?
The lenders that provide bridging finance take calculated risks when they assess a bridging loan application.
Often the property is in poor condition, it may even be uninhabitable. They rely on their experience of similar situations, the security of the property and the fact that their loan will be repaid to them in a few months time.
How you plan to repay the loan is called an ‘exit strategy’ and it is a vitally important part of applying for this type of finance. If the lender doesn’t like your exit plan then the deal is off.
These lenders can work quickly, approving loans in just a few days sometimes, but your part of the deal is being able to repay the loan, plus the interest, on time.
How to plan your exit
You want the lender to approve your application but your stated exit strategy does actually have to work as well!
It’s important to spend some time running through a timeline of events, breaking down the duration for each and any issues or delays that could crop up. Your plan will influence the term of the bridging loan, with options from 3 months to 24/36 months depending on the lender. It’s better to have slightly longer to repay rather than the repayment date looming with no means to pay.
It can be worthwhile to come up with more than one exit strategy, where this is feasible. A back-up or ‘Plan B’ so to speak.
A good example of why this would be needed is trying to achieve a planning gain. A planning gain bridging loan would fund the purchase of a building or some land. Following this you would submit plans requiring planning consent. When these are approved the value of the plot increases dramatically, but you need a Plan B if planning is refused.
Lender’s will appreciate the extra work you have put in assessing the exit and applying contingencies.
Why is an exit strategy so important?
Your plan to repay the loan is one of the most important aspects of a bridging loan and the lender will analyse it carefully. They won’t want to advance a bridge loan without a clear understanding of how they are going to get their money back.
These loans are arranged quickly and are flexible, most lend upto 75% LTV. The flipside is that the interest rates charged are higher than a standard mortgage. So bridging loans can be expensive but aren’t generally affordable as a long term facility and the lenders aren’t looking for that type of business anyway. Both parties will be keen to ensure that the loan is fully repaid within the agreed term.
You don’t make any monthly payments towards a bridging loan. Everything is paid in one go at the end. This will include the capital sum borrowed, interest charges and fees.
Lenders want you to repay them in full and on time. While it’s not uncommon for a loan extension to be granted, once you go past the original term it’s possible for penalty interest to be applied, extra fees and higher rates.
Mortgage Guides
Comprehensive and expertly written mortgage guides
Not on the High Street!
The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
If your situation is a bit different or needs a more personalised solution then our brokers can help.
Expert advice, for all situations.
Bridging Loans
The most flexible of secured loans and often misunderstood. Bridge loans can be used in so many different ways and can be arranged super fast.
Large Loans
High net worth mortgage brokers understand complex large loans and unique situations and can source bespoke deals from the right lenders.
Let to Buy
Let to buy combines a buy to let remortgage with a residential mortgage. Allowing you to move house while keeping your current home.
What exit strategies are there?
There are a few different ways of exiting a short term bridge loan, such as selling the property or converting the finance to a long term mortgage. You could also utilise other money or assets.
Whatever you decide on, and it could involve more than one option, it needs to convince the lender and be realistic.
There’s no definitive list but here are some common strategies:
Property sale
Where the secured property is sold to repay the loan. For example this could be a property bought at auction, given a quick refurb and then sold again. Or when your own home is eventually sold after a breakdown in the property chain.
Refinance
Replacing the bridge with a long term mortgage is a popular choice. The lender will be interested in your ability to qualify for this mortgage and you may be asked to provide some proof. The type of mortgage is varied and could include buy to let mortgage and semi-commercial mortgage.
Exit finance
It is possible to pay off a bridging loan, with another bridging loan. For developers this may allow an exit to a cheaper form of finance once the project is well underway or near completion. A re-bridge is also a possibility if more time is needed.
Sale of another property
Selling other properties may form part of your plan and is a commonly used option. The lender won’t mind too much what type of property it is but they will want to understand the timeframe to completion and the viability of the sale price.
Investments
There may be other investments such as shares, ISAs, bonds etc that you are going to cash in to repay the loan. Bear in mind that these fluctuate in value so your lender may want to see some kind of contingency if markets fall.
Business sale
If the negotiations to sell your business are at an advanced stage you may want to access some of the proceeds now, to buy a holiday cottage, new car or a holiday for example. As always, the lender will want to see details of this.
Inheritance
If you wish to use an inheritance as an exit plan then you will need to provide proof. This would take the form of the will, probate documents and/or confirmation from the executors. Probate can take a long time so the lender needs to see that all of this will be settled before the end of the agreed term.
Pension lump sum
Most lenders should be happy with this and it should be simple enough to provide proof. Your pension will pay out a tax free sum to you on agreed date. Some or all of this is then used to repay the short term bridge.
Don’t be surprised when your bridging lender starts digging into your plan and requests proof of this and copies of that. It is important to them that your loan is repaid on time and your exit plan actually stacks up.
Your bridging loan broker will help you to submit a robust plan, not forgetting some contingencies as well.
The above list is not designed to be exhaustive and there are many other ways to generate the money needed. It’s a good idea to discuss your intentions with your mortgage broker early on in the process in case anything needs to be changed.
If you are ready to take the next step then we can put you in touch with a bridging loan expert
What if you need more time?
Even the best laid plans experience hiccups, unforeseen problems and delays.
If you can see that your repayment deadline can’t be met, explain this to your broker so they can work out some options for you.
It may be possible to approach your existing lender and ask for a term extension. Depending on the reason for the delay, they should be able to give you more time.
If not, then you could apply for a re-bridge with a new lender. This is effectively remortgaging a bridge loan.
Loans that go beyond their term risk being charged penalty interest and fees and are best avoided.
What happens if the loan can’t be paid back on time?
If you have gone through the suggestions above you have hopefully avoided penalty interest. Non-payment of the loan means that you have defaulted on the agreement and then the default bridging rate of interest will be applied, which is unsurprisingly much higher.
Our advice will always be to keep a dialogue going with your lender and to work through the issues.
If the lender is unwilling to provide any further time extensions then it may be appropriate to ask your broker for some refinancing alternatives. If you have other property then this could be utilising another short term loan or perhaps a second charge mortgage.
What would be an unacceptable exit plan?
Often these will be over optimistic plans or a strategy that really hasn’t been worked through properly.
Lenders will need your plan to be reasonable, realistic and appropriate to the time frame agreed. If you underestimate costs with no contingency and then expect a sale to complete within an unreasonably short period of time the lender is not going to agree.
Budgets do run over, contingencies are needed and delays do happen. It’s also wise to have a Plan B and Plan C thought out, just in case.
The exception to the rule: VAT bridging loans
A VAT bridging loan is unusual in that it does not require you to conjure up or explain your exit. This innovative loan can be used to fund the VAT applied when purchasing a commercial property. This would be a separate arrangement to the commercial property mortgage.
And repayment is via the VAT refund, courtesy of HMRC!
We have a separate article that looks at: How much can you borrow with a VAT bridging loan?
In conclusion
It is important to remember that the lenders who offer these types of short term loans do accept quite a lot of risk, even though they may have a charge over the property. In return they need you to supply a well thought out, confident plan of repayment.
They are fully aware that delays happen and plans fail. But how the loan is to be repaid, should one of these events happen, needs to be considered.
If you need some assistance then your broker will be well-placed to help you.
FAQ
Frequently Asked Questions
Are bridging loans regulated?
Sometimes they are, sometimes they aren’t. Read this article to learn more.
What happens at the end of a bridging loan?
The lender will expect you to repay the whole loan in one go, including the interest and any fees.
How long can you have a bridging loan for?
The terms available tend to be between 3 months and 24 months, depending on the lender.
Do I have to use a broker?
You will find quite a small number of lenders deal direct. The maximum choice is only available when using a bridging loan broker.
Is a remortgage a good exit strategy?
It could be. A remortgage could be arranged on the secured property or another that you own.
Can I have a bridging loan for 5 years?
No. Where the loan is needed over a longer period you will need a first charge mortgage or secured loan.
