What is an exit strategy?
An exit strategy is the way you will eventually repay your bridging loan.
The exit strategy should be realistic and credible enough to convince lenders that it can reliably be used to repay the bridging loan. At the end of the loan term, you are expected to repay the bridging loan in full, including any fees and accrued interest.
If you decided to add the arrangement fee to the loan and then roll up the interest the balance will be considerably higher than at the start.
There are quite a few different ways to generate the funds needed to pay off a loan and most of these can be included within your exit strategy.
Why is an exit strategy so important?
If you are unable to provide a clear repayment plan at application stage, this may indicate that you are likely to struggle with repaying your short term bridging loan in full by the end of its term. If this is the case, it is unlikely that your bridging lender will agree to lend you any money.
Your plan to repay the loan is one of the most important aspects of a bridging loan and all lenders will analyse it carefully.
Bridging finance is only for the short term; 3-24 months, so that does not leave enough time to save up the amount on a monthly basis. It needs to be paid off in one go so a larger plan is needed to generate the money over the short term.
It is important that the plan is realistic and fits the timeframe needed. Loans can be paid back early but lenders may charges fees or higher interest when loans are overdue.
What exit strategies are there?
There are quite a few different ways of exiting a bridge loan, such as selling the primary/investment property or refinancing to take on a longer-term mortgage. You could also sell other investments like shares, secondary properties or use an inheritance.
Whichever one is chosen, or maybe it’s a combination of a few, it needs to resonate with the lender so that they have a clear understanding of how it works.
What are the most common exit strategies?
The two most common ways of repaying a bridge loan are through sale of the security property or by refinancing over to a long term mortgage.
This can happen in a few different ways.
If you used the bridging loan as a chainbreaker then when your original home is sold part of the proceeds will be used to settle the loan. It may be possible to obtain a closed bridging loan if contracts have been exchanged or an open bridging loan where completion dates are not yet certain.
Alternatively, by using bridging as auction property finance you can use it to fund the purchase of a property bought at auction. These need to complete very quickly so these types of quick decision loans are perfect. You can then renovate the property and sell it, using some of the proceeds to pay off the loan, this is known as a buy to sell mortgage.
Where a property sale is to be relied on the lender may look at the local property market to see what is selling, for how much and how long it is taking.
In these scenarios the loan is secured on the primary property that will eventually be sold. As the loans are secured, your solicitor will repay them from the sale proceeds so that they are property satisfied.
By refinancing we mean remortgaging or replacing the short term loan with a long term loan or mortgage.
If refinancing is part of the exit strategy then the lender will want to look carefully in to your credit worthiness. Generally speaking bridging lenders are not too bothered about a less than perfect credit profile, unless the borrower needs to borrow money to repay them.
A poor credit status may hinder your ability to get a long term mortgage. This will lead to delays with the planned repayment.
Again, there are a few ways that refinancing can be used.
If we look back to the auction property purchase scenario. It would be possible to purchase the property, renovate it and then refinance to a buy to let mortgage to keep as an investment property. We help a lot of property investors who choose to purchase using a bridging loan before refinancing. It’s a lot quicker and simpler and can also allow time to split titles to generate extra value.
You need to be aware of the 6 month mortgage rule which applies to residential and buy to let mortgages which have been owned for less than six months.
It could also help purchase a property with a very short lease. You can then get the lease extended, which improves its value, and then remortgage to a long term product.
If it is likely that you will keep the property as a buy to let then a bridge to let mortgage might be a good solution.This allows you to buy a run down property, do it up and then keep it using a buy to let mortgage.
Alternative exit strategies
So apart from the main two above, here are a few other ways you can repay a bridging loan.
SALE OF ANOTHER PROPERTY
Using the sale proceeds from an alternative asset, or property, is a common exit strategy. The property can be residential or commercial, the lender won’t mind too much. As long as they feel happy that the sale can be completed within the time frame agreed.
SALE OF INVESTMENTS
If repayment is to be from the sale of shares or a maturing investment then the lender will want to know how this is going to happen. You will also need to convince them of the value if this is something that fluctuates (like shares on the stock market).
This one is for the property developers. Development exit finance will allow a developer to pay off their original loan with a cheaper form of bridging finance, once the project has materially progressed and is at or near practical completion.
SALE OF BUSINESS
Negotiations probably need to be in place if you are relying on the sale of your business. Equally, the sale could be very near to the agreed date but you require funds to quickly snap up a holiday cottage for a bargain price.
PENSION LUMP SUM
If you are able to access the lump sum from your pension arrangements then this is a valid way of paying off a bridging loan. Funds will come from the pension company to you, allowing you to settle the loan balance.
Your inheritance needs to be a fact and not hope. If you’re using inheritance as an exit plan, you’ll need to provide proof – a will, probate documents, or confirmation from your solicitor. The length of time for probate can make lenders cautious about this route though.
What if I need more time?
If you need more time because your exit strategy hasn’t quite worked out then there are a few options.
You could approach the current lender and ask for a term extension. Most should be amenable to this but their decision will be affected by the reason that you give for not being able to repay.
You could apply for a re-bridge with a new lender, effectively like a remortgage for bridging loans.
If you have sufficient equity a second bridge or a secured loan could provide the extra time you need.
Loans that go over term can be charged penalty interest and loans that go into default will damage your credit history. As with all loans and mortgages, if you are experiencing financial difficulty you should discuss this with your lender at the earliest opportunity to agree a way forward.
Speak to an expert about BRIDGING LOANS
We can provide expert guidance and solutions for bridging loans and exit strategies. With over 20 years experience we are well placed to assist all home buyers and property investors.
Call 020 8301 7930 to start your journey with us.