Why is an Exit Strategy Important?
When you hit the end of the term, you are expected to repay the loan in full. If you’re unable to do this, your account will be placed in default. To avoid this situation affecting your credit file, you will have to resolve the situation quickly. Your options are:
- Extend the Loan with Your Current Lender: Consider that you may not be able to continue to roll up interest, if you’re near your maximum loan to value. In addition, the lender may refuse to renew the loan, or may charge a higher interest rate for doing so.
- Refinance to a New Lender: This could well get expensive as you would have to pay all setup costs again. Even if you manage to refinance your bridging loan, you still need to consider your exit. By blindly refinancing, you may just be delaying the inevitable.
If you’re unable to repay your loan and you run out of options, the lender can repossess the property, which could end up with significant financial loss and significant damage to your credit history.
What Exit Strategies Can I Use?
Lenders will often consider several exit strategies, the main ones being:
- Sale of the primary property
- Sale of other investments
- Refinance to a longer-term mortgage
- Sale of a secondary property
- Sale of shares
How Do I Know if it Will Work?
It’s important to consider your exit strategy against the timescale you have available. It is better to borrow for longer than you need to, than to run out of time. Most bridging loan lenders won’t charge you an early repayment fee if you repay the funds early.
If you are looking to sell property, shares or other investments, consider the liquidity of the market and the likely timescales for a transaction being completed.
Property sales, in particular, can take longer than expected. Be aware of the risk of buyers dropping out, taking a long time to complete and failing their finance applications. Buyers don’t tend to be too sympathetic to the situation and will take their time if it suits them.
If you’re looking to refinance, ensure your application will fit criteria by talking the situation through with an independent broker and if possible, also try to get a full agreement in principle from the lender you would like to use.
It is important to understand how many options you have available, if there is only one lender who is willing to refinance you, the situation is far higher risk than it would be if there were 10 options.