Bridging Exit

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Exiting a Bridging Loan

Bridging finance can be a very useful means of raising capital quickly and flexibly to help complete a project.

But what is a bridging exit and why is it so important?

Before you take out a short term bridging loan you should have an exit strategy to pay back the loan within the agreed timescales. These loans are designed to be short term. You will want to exit the bridge because the cost of a bridging loan tends to be higher than conventional mortgages and bridging lenders also want to recoup their capital on time.

Your exit strategy should not be based on pie in the sky plans, it’s important that you have a credible, well thought out and realistic exit plan and the lender will want to be comfortable with it before releasing funds. If you want to avoid additional charges and a higher default bridging loan rate you will certainly want to be confident you can hit your timescales.

Once the bridging loan is in place the lender and any good bridging loan broker should also contact you throughout the term to check how your bridging exit is progressing against plan. Are you on track? What alternatives have you got, if not on track? Communication with the lender is key, sticking your head in the sand will not help you, it’s better to have dialogue throughout the term.

What types of bridging exit are acceptable?

Refinance

One of the most common bridging exit strategies is to refinance the property. You may have used a short term bridging loan for speed – perhaps to buy at auction – or because the property needed some work doing to it before you could raise a traditional mortgage. Either way, refinancing onto a traditional mortgage will bring down the cost of your finance and allow you to extend the loan term over years rather than months.

If you have made improvements to the property that have increased its value, you may well be able to borrow against this increased value and in turn release capital to put back in your pocket for the next project. In this instance you should consider if your estimated increased value is realistic. Do you have comparable evidence of property nearby that is worth a similar amount? The lender will do their own research to check how feasible is your increased value but it is worth doing your homework before you commit to the purchase.

Consider also the timescales for completion of the improvement works, do you have evidence and experience to back them up? Again, be realistic and allow for some contingency if progress is slower than planned. Another thing to consider is how quickly you can remortgage. Some traditional mortgage lenders will not allow you to do so until the property has been registered in your name for at least 6 months. If you’re on a tight deadline then it is essential that you consider this and make sure your solicitor registers the purchase with Land Registry as soon as possible after completion.

If you are using a commercial bridging loan to fund the purchase of a commercial premises you will need to consider the fact that a refinancing on to a commercial mortgage can take much longer than a traditional mortgage. Make sure you factor this into your loan term to allow breathing room for your exit strategy.

Sale of Property

The sale of the property is a common bridging finance exit strategy for investors that see an opportunity to buy a run-down property, complete a refurbishment and then sell it on for a profit, but the time it will take for the sale to complete can be difficult to judge. If your plan is to refurbish and sell the property within six months then the lender may question if this is achievable. We would advise that you allow for worst case scenario and as such, in the above example, a twelve-month term will give you more breathing space. There might not be any difference in the bridging loan rate, however, if you choose to take a bridging loan on a retained or rolled interest basis, the lender will release less cash on day 1 toward the purchase so you need to ensure you have the money to cover the larger deposit requirement.

Cash lump sum

If there is a clear route to a lump sum of money in a certain timeframe then you may use a bridging loan to secure the deal in advance of receiving the cash lump sum. It may be money from a pension or perhaps an inheritance that is pending probate. Alternatively, there may be another property sale that is close to completion, or some investments that are maturing on a certain date. Whatever the source of cash is, providing you can evidence it in some way and all parties are happy with its viability then you can proceed with the purchase, confident you can exit the bridge.

What happens if I don’t pay back my bridging loan at the end of the term?

If you’re unable to execute your bridging finance exit strategy on time then your lender will look to charge some sort of penalty for defaulting on the agreed terms. We find some bridging lenders are willing to provide a short extension on their bridging loan which gives you the facility to service the interest (i.e. make payments) for three months. If you can do this you avoid having to pay the default bridging loan rate of interest and charges which would certainly be higher than the cost of servicing the extension interest.

Some bridging loan lenders charge a 2.5-5% fee on the outstanding balance. Therefore, our previous advice to maintain communication with your lender if you think you are going to miss the deadline may help your cause for some short-term flexibility.

Better still, if you suspect your refurbishment project could overrun you might want to have agreed a bridging loan that is flexible to allow for this. We have arranged bridging loans on a twelve-month term but with nine months retained interest and the last 3 months, if required, would be serviced by monthly interest payments.

What happens if I don’t pay back my bridging loan at the end of the term?

If you’re unable to execute your bridging finance exit strategy on time then your lender will look to charge some sort of penalty for defaulting on the agreed terms. We find some bridging lenders are willing to provide a short extension on their bridging loan which gives you the facility to service the interest (i.e. make payments) for three months. If you can do this you avoid having to pay the default bridging loan rate of interest and charges which would certainly be higher than the cost of servicing the extension interest.

Some bridging loan lenders charge a 2.5-5% fee on the outstanding balance. Therefore, our previous advice to maintain communication with your lender if you think you are going to miss the deadline may help your cause for some short-term flexibility.

Better still, if you suspect your refurbishment project could overrun you might want to have agreed a bridging loan that is flexible to allow for this. We have arranged bridging loans on a twelve-month term but with nine months retained interest and the last 3 months, if required, would be serviced by monthly interest payments.

What type of bridging exit is likely to be unacceptable?

In short, any bridging exit that is not viewed as feasible or credible is unlikely to be acceptable to a lender.

An inexperienced investor may find themselves unstuck if they are tempted to work their figures on the best-case scenario in three key areas: time; cost; and end value. If you think your refurbishment works are going to happen super quickly, or your planning permission is going to fly through the local authority in days then a lender is unlikely to share your optimism. If you underestimate the expected costs with no contingency and inflate the final value of a project when completed, then you undermine the feasibility of your exit strategy with a lender.

We sometimes speak to property investors that have no evidence of current employment, but their intention is to redeem the bridging finance by refinancing using the job they haven’t yet secured. This vague plan isn’t likely to satisfy a bridging lender, but contrast that with ‘here’s a contract for a job starting in one month and here’s confirmation from a lender that will accept my refinance on that basis’. This last scenario would be an acceptable bridging exit plan.

“I need a bridging loan until I can pay back the defaults on my credit cards, then my credit rating will improve and I can remortgage the property.”

VS

“My discharged bankruptcy will drop off my credit file in three month's time and I have an agreement in principle from a lender to remortgage the property when this happens.”

Clearly the latter example is going to provide you and the lender with confidence before taking out the bridging finance.

Having poor credit doesn’t stop you from getting a bridging loan, but you will want to make sure there is a solid plan to refinance or redeem the loan otherwise you risk damaging your credit position further.

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