Repaying a bridging loan is all important. The costs associated with bridging loans are higher than with many other types of loans and if you fail to repay your loan on time, the consequences can be severe.
As such many borrowers have a desire to repay the loan as quickly as possible to avoid any potential issues.
In this guide, we break down what a bridging loan is, whether you can settle them early and how to work out whether it’s a good idea.
What is a bridging loan?
A bridging loan is a short-term loan which is secured against property. They’re often used to purchase a property before your existing one is sold, to fund property refurbishment and finance auction purchases.
These loans are usually taken for no longer than 24 months, with regulated loans restricted to a maximum of 12 months.
Repaying a bridging loan
Bridging loan lenders offer loans only where they are confident that they will be repaid in a timely manner.
To ensure this, when taking out a bridging loan, your lender will ask for details of your exit strategy.
This is simply how you plan on repaying the loan. Common exit strategies include selling the property, selling another property or refinancing the loan to a longer-term mortgage.
Of course, your exit strategy can be almost anything, however the lender will want to check it thoroughly to ensure that it’s realistic and can be relied upon.
If you’d like to fully understand all of the key bridging loan terms, try our bridging loan jargon buster.
Can you repay a bridging loan early?
Yes, lenders are usually happy to accept early repayment of their loans, but how they handle such situation can vary between different lenders.
There are several factors to consider when looking to repay your loan early.
Lender exit fees
These fees are often confused with early repayment charges, which are sometimes charged when mortgages are repaid early.
When taking out a bridging loan, a lender exit fee may be charged. Where this is the case, it is due when the loan is repaid, regardless of whether that is early, on time or late.
Often ignored, this is the equivalent of an early repayment charge. The minimum interest is laid out in the loan offer and can vary from one day, to the entire loan term – although the latter is rare.
If you think there is a reasonable chance that you’ll be repaying early, you should consider the minimum interest carefully when comparing offers from different lenders.
When you repay your loan before you’ve reached your minimum interest period, the difference between the interest paid and the minimum will be added to your redemption statement and must be paid.
Should you repay your bridging loan early?
Where possible, early repayment is usually a good idea. That said, you should always consider the cost of your new loan (where one is being taken) and how that compares to the interest you’ll pay should you not repay early.
The benefits of early repayment aren’t just financial. As a bridging loan has a short term, repaying usually sees you remove the possibility of defaulting on the loan, which has a real benefit. Ultimately, the decision to repay early will come down to your own circumstances and where the funds used to repay will be coming from.