Bridging loans offer a vital lifeline, providing swift access to funds when time is of the essence.
These short-term loans bridge a cash-flow gap, enabling you to seize opportunities or fund unexpected financial hurdles. However, their very nature – being short-term and often carrying higher interest rates – underscores the absolute necessity of a well-defined exit strategy.
An exit strategy is your plan for repaying the bridging loan in full and on time.
It’s not just a formality; it’s the cornerstone of a successful bridging loan application. Lenders scrutinise your exit strategy to assess the feasibility of repayment, and a solid plan can significantly enhance your chances of approval and even secure more favourable terms.
Conversely, a weak or poorly defined exit strategy can lead to loan rejection or, worse, financial difficulties down the line.
Let’s take a look at what an exit strategy is and how it works.
Understanding Bridging Loan Exit Strategies
An exit strategy is your well-defined plan for fully repaying a short-term bridging loan when it’s due.
It’s important because it shows lenders you’re serious about repayment and helps them assess the risk involved.
If you don’t have a solid plan, you might not even get the loan in the first place. And if you do get it but can’t pay it back, you could face big problems like extra fees, higher interest, or even losing the property you used as collateral.
So, having a strong exit strategy isn’t just a good idea – it’s essential for a smooth and successful bridging loan experience.
If you’re unsure how this could work for you, give us a call on 0330 030 5050 and one of our specialist brokers can advise further.
Common Bridging Loan Exit Strategies
When it comes to repaying your bridging loan, there are several well-established strategies.
The most common approaches involve either realising value from assets or securing new financing arrangements. Let’s take a closer look at each of these strategies.
Sale of the financed property
The most straightforward approach, this involves selling the property acquired or improved with the bridging loan to repay the debt. This is a popular choice, especially for property investors or those caught in a broken property chain. The idea is simple: sell the property you purchased (or renovated) with the bridging loan, using the proceeds to clear the debt. However, a realistic property valuation and an understanding of current market conditions are key.
Refinancing to a long-term mortgage
This involves switching from the short-term, higher-interest bridging loan to a more conventional mortgage with a longer repayment term and potentially lower interest rates. Your creditworthiness and ability to meet the mortgage lender’s criteria play a pivotal role in this process and will be assessed by the bridging lender when you apply.
Refinance to a development loan
Property development projects go through various stages, and longer term projects may need to transitional from one loan type to another. It’s quite common for a developer to use planning gain finance to help fund land or property that needs appropriate planning or change of use. Once this has been received they can move to a development finance package for the next phase.
Sale of other assets
If you have other properties, investments, or valuable assets, selling them could provide the funds to repay your loan. Remember, liquidity is key; ensure the assets can be readily sold at a fair price.
Cash redemption
Using personal savings, inheritance, or other readily available cash reserves is a straightforward exit strategy. However, proceed with caution if relying on future or uncertain cash inflows – ensure you have a solid backup plan.
Less Common but Viable Exit Strategies
While the strategies mentioned above are the most frequently used, there are other less common but equally viable options to consider:
Development exit finance
Exit finance is a specialised type of bridging loan designed for property developers. It allows them to refinance their existing development finance loans, providing them with more time to sell completed units or secure long-term financing.
Bridge to let option
Bridge to let finance is a bridging loan with a pre-approved buy to let mortgage attached. The bridge allows you to purchase a run down property, with time allowed for the refurb. Once complete, you move smoothly over to a buy to let mortgage, that repays the bridge.
Equity release
If you’re an older homeowner with significant equity in your property, equity release could be an option. It allows you to access a portion of your property’s value as a lump sum, which can then be used to repay the bridging loan.
Business sale or profits
If you own a business, you might consider selling it or using its profits to repay the loan. However, lenders will typically require strong evidence of a pending sale or consistent profitability.
Inheritance
While repayment via an inheritance can be a viable option, you need to be in a position to prove what is due to you and when it can be realised. The lender will ask for confirmation from a solicitor.
Even Less Common Exit Strategies
This strategy is actually reasonably common, but not everyone knows about it…
VAT Refund from HMRC
Yes, get your bridging loan paid off by the tax man! When you buy a commercial property you will have to pay VAT based on the purchase price. Obviously, you can reclaim this but how long does that leave you out of pocket for? A VAT bridging loan can be used to fund 100% of the VAT bill, with the refund from HMRC your exit strategy.
Let’s talk bridging loans!
Writing a Successful Bridging Loan Exit Strategy
Planning your exit strategy should start as soon as you consider a bridging loan.
By being proactive and carefully evaluating your options, you can set yourself up for success. Remember to clearly define your loan’s purpose, choose a strategy that aligns with your circumstances, and create a detailed plan with contingencies.
The success of your bridging loan hinges on a well-crafted exit strategy. Here’s how to create one that works:
Define your purpose
Clearly articulate why you need the bridging loan. Are you purchasing a property before selling your current one, renovating a property for resale, or seizing a time-sensitive investment opportunity? Understanding your purpose will help you choose the right exit strategy.
Choose the right strategy
The ideal exit strategy aligns with your circumstances, financial goals, and risk tolerance. Consider factors such as the property market, your financial resources, and any potential obstacles.
Develop a detailed plan
Create a timeline with specific milestones and contingencies. If you’re selling a property, factor in the time it may take to find a buyer and complete the sale. If you’re refinancing, ensure you meet the lender’s criteria, if you have a DIP then include this.
Have a backup plan
The property market and financial situations can change unexpectedly. Prepare alternative exit strategies in case your primary plan encounters obstacles. This could involve extending the loan term, selling other assets, or exploring alternative financing options.
Seek professional advice
An experienced finance broker can provide invaluable guidance throughout the process. They can help you assess your financial situation, explore your options, and ensure your exit strategy is sound and realistic.
What if Your Exit Strategy Hits a Snag?
Even with the most meticulous planning, unforeseen circumstances can arise and disrupt your planned exit.
The property market can fluctuate, personal circumstances can change, or unexpected delays can occur. If you anticipate or encounter any challenges in executing your exit strategy, it’s important to take proactive steps to address the situation.
The first and most important step is to communicate with your lender.
The sooner you inform them about any potential issues, the better. Open and honest communication demonstrates your commitment to resolving the situation and can help you explore potential solutions together.
Remember, lenders are generally willing to work with borrowers who are proactive and transparent.
By discussing the challenges you’re facing, you may be able to negotiate a loan extension, explore refinancing options, or even consider alternative repayment methods. The key is to address the issue head-on and avoid defaulting on the loan at all costs.
What About Using a Rebridge Loan?
Sometimes, the best-laid plans go awry, and your original exit strategy might not unfold as expected.
A rebridge loan could offer a lifeline. It’s essentially a new bridging loan that replaces your existing one, giving you additional time to execute your exit strategy or explore alternative options.
However, it’s important to approach rebridging with caution. It will come with additional fees and potentially higher interest rates. A re-bridge loan is not a long-term solution. It’s a temporary measure to provide breathing room while you adjust your plans.
Top Tips
Here are some expert tips to ensure a seamless exit from your bridging loan:
Thorough research
Whether you’re relying on a property sale or refinancing, in-depth research is key. Understand the local property market trends, identify potential buyers or suitable mortgage products, and be aware of any potential obstacles that could impact your exit strategy.
Realistic timelines
It’s essential to be realistic about the timeframes involved in your exit strategy. Property sales, renovations, or securing long-term financing can take longer than anticipated. Factor in potential delays and build buffer time into your plan to avoid unnecessary pressure and financial strain.
Contingency plans
The unexpected can happen, so it’s wise to have backup plans in place. If your primary exit strategy encounters obstacles, be prepared to pivot and explore alternative options. This could involve extending the loan term, selling other assets, or seeking alternative financing solutions.
Professional guidance
The complexities of bridging loans and exit strategies can be challenging. A specialist finance broker can provide invaluable expertise and support throughout the process. They can help you assess your financial situation, explore your options, and ensure your exit strategy is robust and tailored to your needs.
If you’re considering a bridging loan or need expert advice on your exit strategy, we’re here to help. Contact us today for a personalised consultation and let us guide you towards a successful bridging loan journey.
