A bridging exit strategy is crucial – a good broker to help is vital.
Your bridging exit strategy is a plan that you put into place with your broker or lender. This acts as confirmation of how you intend to pay back your loan at the end of the term. Usually, you decide on your bridging exit strategy before you apply for your finance. If you do not have a well thought out exit strategy, it may knock the lender’s confidence in the application. Any decent lender will aim to ensure you have planned your bridging exit strategy well to avoid delays affecting the loan and problems repaying it. If the loan is secured against your home it is even more crucial.
Don’t deal with a lender or broker which doesn’t fully satisfy themselves that your exit strategy is sound. If it isn’t, there could be high penalties or you could be forced to set the security to repay the loan. There are several acceptable exit strategies that borrowers use during their application. These include:
When taking out bridging finance, a common exit strategy is to arrange long-term finance after the bridging loan term has passed. As finance from a bridging loan could be accessed quickly, it could help with the quick acquisition of a property. However, it needs to be repaid and the bridging lender would ask for a confirmed decision in principle from the lender you will use to exit the loan. Therefore, you can start the application process for long term finance on the purchased property sooner and certainly ask your broker to look in to the exit before you commit to the bridging loan.
Buy to let mortgage exit
Assuming a property developer intends to arrange a buy to let mortgage, they might initially use a bridging loan to acquire and refurbish the property before letting and remortgaging it. In most cases the property would need to have been previously rented out or ready to let when you begin the process of getting the buy to let mortgage.
Beware, some buy to let lenders like the property to be owned for at least 6 months before remortgaging. Again you need to discuss this with your broker at the outset as part of the application process.
Bridging finance helps give the borrower buy a property quickly, refurbish it, and obtain the required rental income. However, it is a short term fix and the long term refinance needs to be though through.
Bridge to let loan
This is a bridging loan and a remortgage from the same lender. The advantage is you know you have an exit already agreed to the bridging loan. You might also save some costs such as a second valuation. The downside is it can take longer as the lender has to carry out deeper affordability checks. Also you may end up with a less competitive remortgage as you have not considered the whole market.
Sale of Property or assets
Property developers may use bridging loans to buy property with the intention of flipping the property. The main risk associated with this exit strategy is that a developer may be waiting longer than expected for a buyer. However, once the house is ready for sale, it will be the money generated from the sale that pays the loan back.
Property developers or landlords could use bridging loans to carry out any essential refurbishments required. Most properties in the UK have permitted development rights associated with them. This is the legal right to carry out certain work on a property without the need for planning consent. Using light refurbishments to enhance the property could yield a significant value increase. Light refurbishments could include:
Fitting a new kitchen and/or bathroom
Loft and/or garage conversions
most works which don’t involve the need for planning consent or building regulations
Loans are available up to 85% of the value of the property. However, each of these options still has to fit within the regulations in place. Borrowers need to understand how bridging loans are structured so the can calculate the amount of useable cash they will receive.
Development Exit Loans
Using development exit finance is another viable option for property developers. With this method, you could avoid hefty development loan repayments once work is complete. This is basically using a bridging loan as an exit from a previous bridging loan. Firstly, the main benefit of development exit finance is that it gifts developers extra time to find buyers. In addition, they could also be used as a bridge towards long term finance using the finished developments as security.
Cash redemption is an bridging exit strategy that involves the borrower paying back the bridging loan with a sum of cash. The borrower may show to the lender that they can pay back the full amount required by the lender at the end of the term. Typical fund sources include money from investments, post-probate inheritance, and using money from previously sold property. In addition, for older clients, they can use their pension to pay off the loan. You may have to check with your lender to see if this is a viable option because criteria will vary between lenders.
Can you extend bridging loans?
There is always the possibility that you could extend the terms of your bridging finance. You may have encountered an issue that has caused delays. Depending on your lender and what has caused delays, you may be able to extend your term. However some lenders charge high penalties to do this so make sure your broker search’s the whole market and explains this to you. Ideally agree a longer term at the outset as you should get back the months of interest you don’t use. However, a longer terms means the lender has to account for potentially more interest over the term. This can reduce the amount you get at day 1. Talk to your broker to find the sweet spot.
Make sure your lender doesn’t charge exit fees/redemption fees. You don’t want to be penalised by ending your loan term early. To sum up, exit strategies are a necessity for those applying for bridging finance. They help establish how you plan to pay back the loan and what your next move will be. If you have a strong exit plan, you are seen as a less risky investment. Therefore, the lender shouldn’t have as many concerns with moving forward with your application.
If you don’t have an exit plan, short term bridging isn’t for you. If you still have any questions or queries about acceptable exit strategies, please get in touch with one of our experts at Promise Money.
Promise Money is a broker not a lender. Therefore we offer lenders representing the whole of market for mortgages, secured loans, bridging finance, commercial mortgages and development finance. These loans are secured on property and subject to the borrowers status.
More than 50% of borrowers receive offers better than our representative examples
The %APR rate you will be offered is dependent on your personal circumstances.
Mortgages and Remortgages
Borrow £270,000 over 300 months at 7.1% APRC representative at a fixed rate of 4.79% for 60 months at £1,539.39 per month and thereafter 240 instalments of £2050.55 at 8.49% or the lender’s current variable rate at the time. The total charge for credit is £317,807.66 which includes £2,500 advice / processing fees and £125 application fee. Total repayable £587,807.66
Secured / Second Charge Loans
Borrow £62,000 over 180 months at 9.9% APRC representative at a fixed rate of 7.85% for 60 months at £622.09 per month and thereafter 120 instalments of £667.54 at 9.49% or the lender’s current variable rate at the time. The total charge for credit is £55,730.20 which includes £2,660 advice / processing fees and £125 application fee. Total repayable £117,730.20
Annual Interest Rate (fixed) is 49.7% p.a. with a Representative 49.7% APR, based on borrowing £5,000 and repaying this over 36 monthly repayments. Monthly repayment is £243.57 with a total amount repayable of £8,768.52 which includes the total interest repayable of £3,768.52.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Promise Money is a trading style of Promise Solutions Ltd – Company number 04822774Promise Solutions, Fullard House, Neachells Lane, Wolverhampton, WV11 3QG
Authorised and regulated by the Financial Conduct Authority – Number 681423The Financial Conduct Authority does not regulate some forms of commercial / buy-to-let mortgages
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