How do you exit a bridging loan?

Property developer planning his bridging loan exit strategy
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    If you’re looking to make a swift property investment or don’t have time to wait for your current property to sell before buying a new one, then a bridging loan might be the right financial tool.

    However, as with all loans, a bridging loan is expected to be repaid with a clear plan. This is known as the bridging loan exit strategy.

    When it comes to exiting a bridging loan, it’s always best to plan ahead and determine a suitable exit strategy well in advance. There are various ways to exit a bridging loan, including:

    • Selling a property
    • Securing a longer-term finance solution
    • Extending the loan term
    • Sourcing additional capital

    At One, we are a team of experienced property experts. With our knowledge and long list of connections, we help property developers and homebuyers get the best rates on short-term finance solutions.

    Whether you’re a seasoned property developer eyeing a substantial bridging loan or an individual looking for a fast solution to bridge property sales, this blog has you covered.

    Our experts delve into the intricacies of bridging finance, discovering the various routes borrowers can take to ensure a successful exit strategy. Keep reading to find out how you can seamlessly repay a bridging loan, or get in touch today for tailored advice.

    What is a bridging loan exit strategy?

    Imagine you’re in the process of buying a new home, but the sale of your current one hasn’t gone through yet. That’s where a bridging loan comes in. It acts as a financial bridge to cover the gap between property purchase and property sale with a short-term funding solution.

    However, since it is a short-term loan, it will require an exit strategy. This is essentially your plan for repaying the loan.

    It’s important to keep in mind that having a solid exit strategy is crucial when it comes to bridging loans, as these types of loans typically carry higher interest rates. Repaying the loan as soon as possible is essential to avoid additional costs.

    The key is having a clear plan in place before taking on the bridging loan. This will ensure you’re not stuck being unable to clear the loan within the timescales that you agreed with the lender on day one.

    Why do you need an exit strategy?

    Most lenders will want to know how you intend to repay the loan within the agreed-upon timeframe (also known as the loan term). They’ll likely want to see that you have a credible plan and can pay them back.

    Now, the reason you need an exit strategy is simple: these loans can be a bit pricey with higher interest rates. Without an exit bridging loan strategy, you might get stuck paying those high rates for longer than necessary, which could end up costing you more than you originally budgeted.

    How do exit strategies work?

    Exit strategies work by providing you and your bridging lender with a clear path to repaying the loan. It enables a smooth transition from temporary finance to a more permanent finance solution (such as a mortgage) or clearing the loan completely.

    What exit strategies do bridging loan lenders accept?

    A bridging loan is never a one-size-fits-all type of finance; exit strategies can come with various terms and conditions. By working with an experienced bridging loan broker, which the team at One can help you find, you can benefit from a well-thought-out exit plan before taking on the loan. This will ensure a timely exit and help you avoid unnecessary costs.

    Most bridging loan lenders will accept common exit strategies.

    Property sales

    This is often one of the most popular ways to clear a bridge loan. It involves selling an existing property to repay the loan, usually the property against which the loan is secured. The property sale should be enough to clear the loan and any associated costs, such as the interest.

    Refinancing

    Another popular option for exiting a bridging loan is to refinance to a longer-term finance solution with a new lender. This can include securing a standard mortgage to replace the bridging loan.

    Equity release

    Taking equity from your property or other asset can also be an acceptable way to clear an outstanding loan. For instance, bridging finance may have been used to purchase or improve a property while you wait for alternative lending. In this case, you can extract additional funds from the increased value of the property to repay the loan.

    Alternative exit strategies

    Bridging lenders often offer flexibility in situations you may not find elsewhere. At One, we have helped property investors, developers, and homeowners negotiate their exit strategies using alternative methods.

    Pension lump sum

    A pension lump sum is a one-time payment that individuals may choose to receive from their pension pot instead of regular pension payments, providing them with a lump sum of money upfront.

    While it can come with some tax implications, some lenders will accept this as a suitable loan repayment method in certain complex situations.

    Inheritance

    Sometimes, a bridging loan is used to bridge the gap while obtaining probate documents to receive inherited property. In this situation, once the inherited property has been sold, borrowers can use the funds to repay the bridging loan.

    What can’t be used as an exit strategy?

    While many exit strategies for bridging loans are commonly accepted, specific approaches may be less favourable or not permitted by lenders.

    The list is long, but we have provided a few here that are not commonly accepted:

    • Reliable value: Relying on an overly optimistic sale price for the existing property that may not be achievable in the market. Lenders’ valuations of your property will be used to decide if they will lend to you and whether the property value is enough to pay them back.
    • Unverified future income: Depending on uncertain future income or business projections without solid evidence or guarantees. Lenders like certainty and will often not estimate how you will fund the loan repayments.
    • Unstable investments: Counting on the success of high-risk investments or ventures that are unreliable or may take an extended period to provide enough funding to clear the loan. This is typically not accepted as a repayment plan by lenders, as it can come with a high risk if the investments don’t deliver.
    • Incomplete planning: Lacking a clear and realistic plan for repayment causes uncertainty for the lender. The team at One can help you avoid this by connecting you to the most knowledgeable brokers who will assist you in presenting a solid case.

    Can you exit bridging loans early?

    Absolutely! Exiting a bridging loan early is encouraged because if you can clear it quickly, you will avoid unnecessary interest and costs. You can do this by paying back the loan before the agreed-upon loan term ends.

    Just make sure to check your loan terms with your existing lender, as some may have specific conditions or charges for early repayment. This should also form a big part of your planning, and a good broker or lender should challenge you.

    What happens if your exit strategy doesn’t work?

    Things don’t always go to plan, and some of our enquiries reflect this. If you plan to sell a property but are unable to do so, or if a long-term mortgage application falls through, it gets tricky. Lenders may begin to pressure you for repayment plans.

    Should you have a backup plan?

    Having a solid backup plan is extremely important. Have you considered options like securing additional financing, reassessing your sale timeline, or exploring alternative exit finance using a secondary property or other investments?

    Life can throw unforeseen circumstances your way, and if your primary strategy to repay your bridging loan faces a setback, a backup plan can save the day.

    You should always communicate with the bridging lender, stay proactive, and be prepared to change your plans. Lenders may be open to amending your repayment plans, such as extending the loan term or offering a rebridge to avoid penalty interest.

    Get in touch with One today for bridging finance services

    At One, we have over 100 years of combined experience in the property industry, and we’re here as your trusted experts in navigating the complexities of short-term finance. Whether you’re exploring exit strategies, seeking bridging loan options, or require professional guidance, we will connect you to the right broker for your situation.

    Our personal and efficient solutions, designed with property developers and investors in mind, ensure that your path to a successful property purchase is swift and well-guided.

    If you’re looking to make a commercial or residential property investment and want to plan ahead with a robust exit strategy, then contact One today. With our experience and wide network of experts, we’ll put you in the best position to secure the finance you need.

    Mark Piper
    Mark Piper

    Mark is the senior advisor at One Commercial Loans and has a wealth of experience in bridging and property finance.

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