Can You Repay A Bridging Loan Early?

Due to the costs associated with bridging loans being higher compared to other forms of property finance, being able to repay the loan on time, or early is crucial.

Default costs tend to be 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 look 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 repay a bridging loan 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 bridge a short term gap in funding, such as when you buy a property before your existing one is sold, to fund property refurbishment before taking out a mortgage and to finance auction purchases – known as auction finance.

Bridging finance is usually taken for no longer than 18 months, however longer terms are available and the pre-agreed term generally ties up with your exit strategy.

Regulated bridging loans are restricted to a maximum term 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 and within the pre-agreed term.

To ensure this, when taking out a bridging loan, your lender will ask for details of your exit strategy.

Common exit strategies include selling the property, selling another property or refinancing the loan onto a longer term mortgage.

Of course, there are other forms of exit strategy and they can be almost anything. However, the lender will check this thoroughly to ensure that it’s realistic and can be relied upon.

Can you repay a bridging loan early?

Yes, lenders are 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 at repaying 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, some lenders charge an exit fee. Where this is the case, it is due when the loan is repaid, regardless of whether that is early, on time or late.

Details of exit fees will be disclosed in your bridging loan offer letter. Not all loans come with an exit fee, so be clear on whether any potential loan does, as avoiding exit fees can lead to significant savings.

Typical exit fees (where charged) are usually 1-2% of the loan amount, or 1 months interest.

In some cases, if the interest rate is low, a product with an exit fee may still cost less overall.

Minimum interest

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.

All lenders charge a minimum interest earnings period. The minimum period is the first full months interest, however this is never likely to be an issue as needing a bridging loan for less than a month is uncommon.

Some lenders charge minimum interest of 3 – 6 months, meaning that if you repay the loan after 2 months, you are still charged 3 – 6 months’ worth of interest.

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.

Interest charging period

Some lenders charge interest on a daily basis, and some monthly. If your lender charges monthly interest, you should take this into account when choosing to repay early as borrowing for 1 month and 1 day would see you pay a full 2 months interest.

Where this is the case, you may choose to wait until the end of the charging period before repaying to get the most from your funds, or make sure the loan doesn’t roll into the next month.

Should you repay your bridging loan early?

In most cases, early repayment is usually a good idea, if it will save you money. 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, repayment 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.

If you are switching onto development finance the new loan may be more expensive, therefore you may wish to hold onto the bridging loan facility for longer and use the development loan for a shorter time.

Alternatively, if you re repaying the bridge with a mortgage, which are usually lower in interest rate, you may look to refinance sooner.

Keep reading – Bridging Loans Vs Development Finance or What Happens If You Don’t Pay Back A Bridging Loan On Time?

What should I consider when looking to repay a bridging loan early?

The following steps should be considered:

1. Check your loan agreement for details on early repayment and exit fees.
2. Speak with your lender to check if there are options of early repayment without penalties.
3. Work out the total amount owed on redemption, including any interest up to the repayment date.
4. When you have funds in place for repayment, i.e. sale or refinance, notify your lender of your plan to repay early.
5. Typically, the loan will be repaid through solicitors.

If you used a bridging loan broker to set up the loan, they will often also help arrange repayment and liaise with the lender for you.

How much will I save by paying my bridging loan early?

This depends on how early the loan is repaid and what interest rate you’re paying.

An example is if your loan is £100,000 and the rate is 0.6% per month, the interest is £600 per month. You can calculate the saving by multiplying the £600 by the number of months you plan on paying early. If you pay the loan off 6 months early, the saving is £3,600 plus your exit fee (if applicable).

Frequently asked questions

How do you pay back the loan?

There are numerous ways to pay back bridging finance, they include sale of a property, refinance, inheritance, sale of stocks or shares.

Funds can be paid from any legal purpose, and the lender will carry out anti-money laundering (AML) checks to verify this.

Can ABC Finance help me repay my loan early?

Yes, if we arranged your bridging loan we’ll happy deal with the lender or help arrange an exit strategy so that you can repay your loan early.