Can I extend the term of a bridging loan?

Can I extend the term of a bridging loan?

Are you considering if your bridging loan can be extended? This is a common question among borrowers who find themselves needing more time to meet their financial goals. It is important to plan your bridging loan well at the outset to avoid this question ever arising.

Bridging loans are designed as short-term financing solutions, often used to bridge the gap between making a purchase and securing long-term funding. However, circumstances can change, prompting the need for an extension.

Understanding the flexibility and terms of bridging finance is crucial before entering an agreement. In this article, we’ll explore the possibilities and conditions under which you might extend a bridging loan, the steps involved, and the potential impacts on your financial health.

What is a Bridging Loan?

A bridging loan is short-term finance, normally for real estate transactions. It covers costs until you secure permanent financing or sell the property. Homebuyers often use these loans when they buy a new property before selling their current one.

Bridging loans are also popular among property developers and investors looking to refurbish or sell properties quickly.

The key features of bridging loans include their short duration—usually 12 months or less—and their relatively high interest rates compared to traditional loans. They are intended as a temporary solution, providing fast, flexible funding to help borrowers achieve their immediate objectives.

Can You Extend the Term of a Bridging Loan?

It is possible to extend the term of a bridging loan, but this depends on the lender and the specific terms of your loan agreement. Extensions can incur additional costs and may require a review of your financial situation and the reasons for the extension request.

Lenders typically allow extensions as part of their service flexibility, understanding that project delays and other unforeseen circumstances can occur. However, obtaining an extension will usually involve reassessment of your loan terms, potential adjustment of interest rates, and possibly additional fees.

Regulated loans

These are loans which are secured on your main residence. The loan is regulated by the Financial Conduct Authority to provide additional protection to homeowners. However the loans are normally limited to 12 months. Lenders do not like to extend the loan beyond that period as the FCA generally frown on this practice. It can involve the lender in additional reporting and raise a red flag with the regulator. Consequently, when you take out a regulated bridging loan, lenders will carry out additional due diligence to ensure that you can exit the loan within 12 months. See the FCA rules – MCOB 11.6.55

One of the upsides of taking out a regulated loan is that the lender is duty bound to consider your interests and treat you fairly. Therefore, they should act reasonably and not charge harsh penalties. This may not be the case if you select an unregulated lender.

Did you have an exit plan before you took out the bridging loan?

If you are worried about this before you take out the bridging loan, talk to your broker about extending the term a little longer from the outset. Even if you are rolling up the interest, if there is sufficient equity you can take the loan over a longer term. The additional interest will form part of the loan but there are normally rebates available if you don’t use the interest. It may be far more cost-effective than paying renewal fees and default interest rates.

A strong exit plan is crucial

When considering if your bridging loan can be extended, remember lenders will insist on there being a strong exit plan from the outset. However, some borrowers are tempted to be over optimistic. This is dangerous and costly. Give some serious thoughts to anything which could go wrong in your exit plan. Then have a plan B. Hoping for the best is fine, but plan for the worst. An honest and frank conversation with your broker is vital. A good broker will try and find gaps in your strategy to ensure you are protected.

If it’s not too late, watch this video.

How to Request for your bridging loan to be extended

If you find yourself needing more time to repay your bridging loan, the first step is to contact your lender. Here’s how you can approach this:

• Review Your Contract: Check your loan agreement for any clauses related to extensions and understand any associated conditions or fees.
• Prepare Your Case: Be ready to explain why you need the extension. This could be due to delays in selling your property, unexpected planning permission issues, or other valid reasons.
• Negotiate Terms: Discuss the new terms with your lender. This might involve negotiating the extension period, revised interest rates, and any additional charges.

Being proactive and transparent with your lender will help facilitate the process and increase the chances of a favorable outcome.

Pros and Cons of a bridging loan being extended

Extending a bridging loan can be a double-edged sword. Here are some pros and cons to consider:

• Pros:
  • Provides more time to secure long-term financing or sell your property.
  • Prevents defaulting on the loan, which could damage your credit score.
  • Allows continued control over a property in a rising market.
• Cons:
  • Higher overall cost due to extended interest payments.
  • Possible increase in interest rates and additional fees.
  • Risk of becoming overly reliant on short-term financing solutions.

Alternatives to Extending a Bridging Loan

If extending your bridging loan seems too risky or expensive, consider these alternatives:

• Refinancing: You might find a better deal or a more suitable long-term loan with another lender.
• Selling Assets: Selling other assets may help you repay the loan without needing an extension.
• Negotiating Sale Terms: If you’re selling a property, you might negotiate a quicker sale or better terms to clear your loan sooner.

Each option has its own set of implications, so it’s important to weigh these carefully against your personal and financial circumstances.

People Also Asked

What are the typical interest rates for bridging loans?

Bridging loan interest rates are usually higher than those for traditional loans, often ranging from 0.5% to 1.5% per month.

Can a bridging loan be paid off early?

Bridging loans allow early repayment, though some may carry early exit fees. Check your loan agreement for specific terms.

What are the common uses of bridging loans?

Need to buy property quickly, bid at an auction, or start a development project? Bridging loans are a great option for fast funding.

Are there any specific requirements for securing a bridging loan?

Lenders typically require a clear exit strategy and may also consider the borrower’s credit history and the property’s value and condition.

How quickly can you obtain a bridging loan?

Bridging loans often be arranged within a few weeks, making them much faster to secure than conventional loans.