Why Bridging Loan Exit Strategies Need a Plan B (and C)


Bridging Loans Thumbnail imageUncertainty has become the only constant where the UK’s turbulent economy is concerned. If the last few years have taught us anything, it is that nothing is set in stone. Irrespective of how safe and stable something seems, nobody knows what is coming next.

As things stand, average UK property prices are once again hovering at all-time highs. According to the latest figures from Rightmove, it now costs an average of just under £370,000 to purchase a property in the UK.

House prices in most regions of the country are up around 10% from the same time last year and further growth is predicted indefinitely.

All of which is prompting more investors (new and established) than ever before to consider capitalising on this demand. Some are buying homes to refurbish and sell on for capital gains, while others are setting their sights on longer-term rent yields.

In both instances, bridging finance is helping more investors than ever before beat competing bidders to the punch.

The Importance of a Viable Exit Strategy

In order to qualify for a competitive bridging loan, lenders expect to see convincing evidence of a viable exit strategy. More often than not, the exit strategy for a bridging loan will take one of two forms:

  1. Selling the property that was purchased with the bridging loan (or other assets of value) to raise the funds needed to repay the facility.
  2. Refinancing onto a longer-term repayment product, such as a commercial mortgage or a conventional buy-to-let mortgage.

But what has become clear as of late is that irrespective of how robust a borrower’s planned exit strategy may be, it may run into issues along the way. Selling a property, for example, means lining up an appropriate buyer (and completing the sale) before repayment of the loan is due. Even if the sale of a property does go through as planned, its actual sale price may be lower than its projected value, leaving a deficit that needs to be paid.

When planning to refinance a bridging loan onto a longer-term product, eligibility may be affected by the condition of the property at the time. With a conventional buy-to-let mortgage, for example, only habitable homes in a good state of repair are considered eligible by most lenders.

If things go wrong, there is always the option of requesting an extension from the original bridging loan provider. But as this can often mean elevated rates of interest and penalty fees, it is far from the ideal option in most instances.

The Importance of Careful Provider Selection

Qualifying for a competitive bridging loan means presenting a convincing case to your preferred lender, in today’s increasingly uncertain times this can often mean providing evidence of not just an initial exit strategy, but also of your contingency planning, in case things go wrong.

Lenders want to see due diligence on the part of their clients and may be discouraged by a disproportionate reliance on a sole planned exit strategy. They want to know that if things go wrong; their applicants have taken into account all feasible scenarios.

This is where working with a skilled and experienced broker can help. Your broker will help you find the perfect product to suit your requirements, while at the same time providing the support you need to present a convincing case.  Importantly, your broker will ensure a fair and flexible agreement is reached with a responsible lender, where excessive fees and penalties where difficulties are encountered can be ruled out of the equation.

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