What Happens If You Don’t Pay Back A Bridging Loan On Time?

What happens if I can’t pay my bridging loan interest?

If you’re unable to pay your bridging loan interest, where your bridging loan is serviced monthly, you will fall into arrears with your lender and breach the terms of the agreement. Much like with a standard mortgage.

Falling into arrears means that the loan balance, and therefore the loan to value increases. This is because the unpaid interest is outstanding and added to the redemption balance.

Due to the short-term nature of bridging loans, the default process tends to escalate quicker than it would for mortgages.

This is often made worse by the fact that bridging finance interest rates are higher than when compared to a standard mortgage. This is because if the interest rate is higher, a larger amount of interest is added to the loan. This in-turn eats away at the equity at a much faster rate meaning the lender needs to act quickly, otherwise they may face making a loss on the loan.

The process of handling missed payments can be more predictable for regulated bridging loans than unregulated finance. This is because FCA regulated bridging loan lenders must abide by the rules of the financial conduct authority (FCA), whereas unregulated bridging loans don’t offer the same protection.

A late payment is usually less serious than a missed payment. That is where the interest is paid within the same month that is it due, just not on the agreed payment date. A missed payment is when the payment has been missed altogether and is slightly more concerning.

That said, there are certain steps that can be taken to give yourself the best chance of coming out the other side relatively unscathed.

What happens if I can’t pay back the loan at the end of the term?

Short-term bridging loans always have an agreed payment date set up at the outset. Failure to repay the loan at the end of the term is a breach of your lending terms. You may be in a position to keep the loan running and pay the interest monthly, however the lender may not agree to this.

If the lender does consider allowing you to keep the loan and pay monthly, they will likely require proof of income to ensure that this is feasible.

That’s why it’s important that your exit strategy is robust and the term you’ve chosen is sufficient for the exit strategy to play out.

Under FCA rules, regulated bridging loans cannot be offered for terms of over 12 months. Because of this, your exit strategy is key and the lender will be strict when assessing this.

If for example you are selling a property to repay the loan, the lender will want to ensure that the price it is advertised for isn’t too high to stop it from selling within the 12 months. This is often determined by a valuation and valuers comments.

Again with regulated bridging finance, if a refurbishment is required, the refurbishment must be complete and the loan repaid within the 12 month period. This can be a struggle if you are selling to exit.

What will happen if I default on my loan?

Different lenders have their own criteria around this and each treats the situation differently. There’s no ‘one size fits all’ answer to this question.

That said there are some common approaches that lenders take.

Default interest

Default interest is a tool used by lenders when a payment is missed, or the terms and conditions of the loan are broken.

Default interest rates are higher than the regular interest rate that was originally agreed. The default interest rate is usually documented in the original lending documents that must be signed prior to taking out the loan.

Default interest can come into effect from the moment of default, or can even be retrospectively applied to the loan from when it was first taken out. The latter approach being more common with less reputable lenders.

Not all lenders charge default interest and if they do, can be flexible with their approach.

Additional fees

Some lenders will charge additional fees in the event of default. These fees can range from a simple late payment fee – which is usually relatively small – right up to regular ‘account review’ fees – which can be very high.

The latter are often seen as less fair and are used more by less reputable lenders. They can result in your balance increasing quickly, making it ever more difficult to repay the loan.

A good broker will always ensure that lenders who use these practices are avoided wherever possible.

Calling in the loan

In more serious cases, the lender may demand full repayment of the loan, even if you have no clear way of doing so. Non-payment in this scenario can lead to repossession.

This is usually reserved for cases where the account has several missed payments or the terms of the loan have been badly broken. Common examples are where you start living in a property that you said would be let out, or you’ve begun heavy refurbishment works that were never disclosed to the lender.

This practice is more common for unregulated bridging loans than regulated, where you’re offered a greater degree of protection.

Appointing liquidators

Liquidators are used where the loan is taken by a company. They are appointed to get the lenders money back and will wind up the borrowing entity to do so.

Their focus will be on converting any assets in the business into cash – which means selling the security property.

This is a very serious approach and won’t usually happen until you’ve been given time to get things back on track.

Will I be repossessed?

Repossession is a possibility but is the last resort for most lenders.  A lender is only likely to repossess immediately if they are concerned that there will be a shortfall on the debt, for example if the loan to value is high.

While you still have a way of getting the loan back on track, for example you are actively trying to sell the property, lenders will tend to hold fire on repossession proceedings.

That said, some unscrupulous lenders are faster to go for repossession than others and may offer you less time.

While it is a last resort, if your loan remains in default, it is where you will end up should matters not be resolved.

Top tips for avoiding issues in repaying your bridging loan

Should you find yourself in financial difficulty and unable to repay your loan, there are a number of steps you can take to get things back on track.

Ensure you can repay the loan before you take it out

This may seem obvious, however this is key to any bridging loan transaction. When you apply for a bridging loan, the exit strategy is one of the first things asked for by a lender and they will want this to be as watertight as possible.

Talk to your lender

Communication is key. Your lender will usually take a more relaxed approach to any issues that arise if you’re upfront and honest about them.

Of course, clear communication must then be backed by action. If you’ve told your lender that you will bring your payments up to date by a certain time, it must happen, or your credibility will take a serious hit.

This will make it harder for the lender to believe what you say in the future and will obviously affect the relationship.

In this situation you’d be far better off telling the truth – that you can’t bring the payments up to date, but you will look to sell the property or similar.

Try to bring forward your exit strategy

If your exit strategy is the sale of the property, then looking to expedite that will pay dividends.

You must consider the cost of continued default (both financially and from a health perspective), against the cost of accepting a lower offer for a quick sale or selling via an auction.

If you’ll be repaying the loan through a refinance, get the ball rolling immediately and look to complete things quickly.

Consider rebridging loans

Rebridging loans are a type of bridging finance that are used to repay an existing bridging loan. They can be used to repay a loan that’s reached the end of its term, or fallen into difficulty for any reason. Where a loan has been taken with serviced monthly interest, a re-bridging loan onto a product with rolled up interest could be taken to ease the financial burden each month.

FAQ’s

Why would a bridging loan not be repaid on time?

There are many reasons why a bridging loan may not be repaid on time, some of the common instances we see are:

A delay in in selling a property or asset

Due to the property market being stagnant in areas, some properties can take a while to sell.

Delays in in the construction of a refurbishment project

When refurbishing or developing a property, there can be delays with materials, builders or even the weather can halt things.

Personal delays

There can be unexpected personal delays such as injury, illness or a bereavement that can cause delays.

To continue your reading, why not try Can You Repay A Bridging Loan Early?