What happens if I can’t pay my bridging loan interest?
Failure to pay your monthly interest (where your bridging loan is serviced monthly) will quickly result in issues with your lender.
Due to the short-term nature of bridging loans, the default process tends to play out far quicker than it would for mortgages.
This is often compounded by the fact that bridging finance interest rates are higher than for the equivalent mortgage.
The process of handling missed payments is often more predictable for regulated bridging loans than unregulated.
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.
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?
Failure to repay the loan at the end of the term is a breach of your lending terms, and even if you’re able to keep paying the monthly interest, the lender will usually still be unhappy.
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.
What will happen if I default on my loan?
Each lender has their own way of dealing with defaults, and there’s no ‘one size fits all’ answer to this question.
That said, there are some common approaches that lenders take.
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.
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.
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.
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 ultimately the final option for lenders and really is a last resort.
While you still have a way of getting the loan back on track, repossession will usually not be on the table.
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.
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.
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.