Why is an exit strategy important?
When you reach 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.
These loans aren’t generally affordable as a long-term loan, and the lenders aren’t looking to fund on that basis. As such, all parties are keen to ensure that the loan can be repaid in full and on time.
Where your exit strategy fails, there are often default charges to pay, and some lenders charge high fees in this situation.
In the event of your exit strategy failing, 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.
How do I know if it will work?
It’s important to consider your exit strategy against the timescales you have available. It’s 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.
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
Breaking down the different exit strategies
When choosing an exit strategy, the lender may require further information or require further conditions to be met. These conditions will vary depending on the method chosen.
The stronger your exit strategy, the less likely you are to face further questions from the lender. Here is a breakdown of the main options:
Sale of the security property
When selling the property that is security for the loan, the lender may insist that the property is on the market on or before completion of the loan. To ensure this is the case, they will usually request proof – which can easily be provided by sending a link to the property for sale at your chosen agent’s website.
Where refurb will be undertaken prior to the sale, the lender will usually waive this requirement, instead setting a time in the future that the property must be marketed by.
There may also be a condition in the loan terms to state that regular marketing updates must be given to the lender by the agent, especially in the final months of the loan.
Where your property is being sold, the lender will usually look at the average time taken to sold similar properties in your area. This measure is used to ensure that the chosen term is realistic.
Sale of the security property is generally the simplest route when applying for a bridging loan.
Sale of other investments
When selling other investments, the key is to ensure that the items have a reliable value and are liquid.
The key to this exit strategy is proving the above and agreeing when they will be sold.
Generally speaking, it will be much easier to use this strategy when selling tangible items like classic cars or antiques, or shares in strong businesses than investments in small businesses.
Refinance to a longer-term mortgage
Refinance to a mortgage is a common exit strategy for bridging loans. When taking this route, the lender will want to know that the plan is realistic.
As such, they will ask for proof that the application will fit the new lenders criteria. This is generally done by showing the bridging lender an agreement in principle from the new lender. Where this can’t be produced, the lender may accept being shown the criteria of the lender (usually via their website) and proof that you fit it.
This can be a relatively straightforward exit route, where an agreement in principle is available.
Sale of a secondary property
Sale of a secondary property (a property other than that used as security for the loan) can be a trickier exit strategy than you may imagine.
As the lender generally doesn’t have a charge on the property, they won’t have control over the exit. Ultimately lenders do not lend with the intention of repossessing property, so don’t like to rely on being able to repossess the security property.
As such, lenders will often either ask for a charge over the property being sold. Where this isn’t possible, conditions in the agreement with the agent to offer them updates and step in rights may be required.
Some lenders will take a more relaxed view and just allow you to handle your own sale, but this isn’t a given.
Where an inheritance will be used to repay the loan, the lender will need to see proof that this is a certainty and will need to understand the timescales.
Proof will usually be given by showing a copy of the will, probate documents or confirmation from the acting solicitor.
The ease with which the exit strategy can be implemented will all come down to the level of proof you’re able to offer. It is actually a low-risk route for the lender, as long as there is plenty of detail available.