What happens if you are unable to repay a bridging loan?

What happens if you are unable to repay a bridging loan?

If you are unable to repay a bridging loan, the first thing to do is to talk to the lender and find out the implications. Secondly talk to a broker who has bridging expertise and also access to all of the other property finance products on the market. This might help you exit the bridge sooner rather than later.

Here is a horror story to focus your mind. A client was unable to pay off their bridging loan within the agreed time scales. The lender agreement they had signed was a shocker.

• The lender was able to charge an additional 2% fee to extend the facility
• The interest rate increased from roughly 1% to 3% for any additional payments.
• The rate increase was also applied all the way back to the start of the loan as well as going forward.

Imagine the impact of going a week past the date the loan should have been redeemed on a £250,000 loan taken over 12 months.

• 2% fee to extend the facility for a further six months = £5000
• 3% per month for the following 6 months = £45000
• 2% per month backdated to the start of the loan – (£250,000 x 2%) x12 months = £60,000

That’s £110,000 in extra costs just for being a week late.

This is a very extreme example but, if nothing else, I hope it encourages you only deal with reputable lenders and always read the small print.

Fortunately, most lenders are far more reasonable if you are unable to repay a bridging loan. Understanding the possible outcomes and preparing for them is key to managing this risk effectively.

This guide will walk you through the impacts of failing to repay a bridging loan, the steps lenders might take, and strategies you can employ to mitigate the situation. We’ll explore how this affects your financial health and provide practical tips to help you navigate these challenging circumstances.

First Rule Of Bridging

Make sure your exit is rocksteady before your borrow.

Write down all the things which could go wrong and devise a Plan B for each scenario if you possibly can. Hope for the best but plan for the worst.

Immediate impact of Non-Repayment of your Bridging Loan

Missing a repayment deadline on a bridging loan can lead to several immediate actions by the lender. Firstly, you’ll likely incur late fees or a fee to renew the facility. Even if they only charged you a 1% fee to renew, that’s a big expense if you are able to settle the loan a week or so later.

Secondly they may charge a default interest rate for the remaining term of the loan. Some lenders do, some lenders don’t. Bridging lenders which are authorized and regulated by the FCA should offer more reasonable terms. Unregulated lenders are more at liberty to charge what they wish. Either way, the details should all be written down in the agreement you signed. Definitely read the small print.

What if your original loan was already at the maximum LTV when you took it out?

In this scenario, the lender won’t want to continue rolling up any interest. This is because it is eating into their equity and could result in them making a loss if they had to repossess and sell the property. Therefore come at they may ask you to service the debt on a monthly basis. If you can’t do this the conversation can become awkward and the lender may be looking at court proceedings sooner rather than later to protect their position.

The better lenders will contact you well in advance of the end day of your loan. They will discuss and check that your plans to exit the loan on time are on track. At this stage, they will not want to extend the loan and probably won’t be thinking about repossession. They will be more focused on getting you back on track which may mean selling your property quickly or refinancing it. However, if there is very little free equity left in the property they are likely to take a harder line.

When lenders contact you to discuss any missed payment and potential resolutions, it’s crucial to respond promptly and honestly in these communications. Ignoring the lender can worsen the situation, leading to more severe consequences.

Have a Plan B if you are unable to repay a bridging loan

Talk to your broker honestly about why you are unable to repay the bridging loan and your time scales to be able to do so.
Your current lender may be prepared to extend the loan period, but they won’t want to do it for long.
It may therefore be better to consider potentially refinancing the entire debt with a different lender.

If you are refinancing, using a broker who also has a relationship with your bridging lender can be helpful. With your permission, your broker can reassure the existing lender that everything is going smoothly.

Lender’s Actions and Legal Proceedings

If you are still unable to repay a bridging loan, the lender may initiate legal proceedings to recover the debt. This could include court actions leading to the repossession of any collateral you used to secure the loan, typically your property.

Understanding the legal process can help you prepare for what’s ahead. It’s wise to seek legal advice if you find yourself in this situation. Knowing your rights and options can make a significant difference in the outcome.

Impact on Credit Score and Future Financing

A default on a bridging loan could significantly impact your credit score if your lender provides credit data to the search agencies. This makes obtaining future financing more difficult and more expensive. A poor credit history can affect other areas of your financial life, such as increasing insurance premiums or affecting rental agreements.

It’s important to consider long-term effects and work on rebuilding your credit score if you’ve experienced a default. Regularly checking your credit report, paying bills on time, and reducing outstanding debts are good starting points. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it (AD).

Be open if you are unable to repay the bridging loan

In the face of financial difficulty, communicating openly with your lender can lead to solutions like restructuring the loan. This might involve extending the loan term, adjusting payment amounts, or even a temporary payment holiday.

Lenders often prefer to find a workable solution rather than taking legal action, which is costly and time-consuming for both parties. Don’t hesitate to discuss your financial situation with them; you might find they are more flexible than expected.

Solutions and Advice if you are unable to repay your bridging loan

If repayment seems impossible, consider other financial options. Selling assets, securing another loan with more favorable terms, or even viable debt management routes, depending on your situation.

Seeking advice from financial advisors or debt counselors can provide clarity and direction. Free advice is available through government-backed organizations such as Money Helper. These professionals can offer strategies and resources that you might not have considered, helping you to navigate through this tough period.

People Also Asked

Can I extend a bridging loan term?

Yes, some lenders may allow you to extend the loan term. This usually requires a review of your financial situation and renegotiation of loan terms. Expect to pay additional fees and potentially a higher rate.

What is the average interest rate for bridging loans?

The interest rates for bridging loans can vary widely, typically between 0.5% to 1.5% per month, depending on the lender and your financial details.

Are there any alternatives to bridging loans?

Yes, alternatives include personal loans, home equity lines of credit, or long-term mortgages, depending on your financial needs and circumstances.

How quickly do I need to act if I can’t make a loan payment?

It’s crucial to act immediately by informing your lender and discussing potential solutions. Prompt action can prevent more severe consequences.

Is it possible to refinance a bridging loan?

Refinancing a bridging loan is possible and can be a viable option to avoid defaulting, especially if you can secure a loan with better terms.