An exit strategy for a bridging loan is a repayment plan at the end of term duration; this plan should be realistic, credible, and achievable. The bridging Loan market in the UK has tripled over the last decade. Bridging finance/p2p lending offers temporary finance for a short-term duration. That is between 1 to 12 months. You can bridge a gap between property purchases in that time. This short-term finance is secured against some collateral, e.g., real estate.
This article will outline what an exit strategy is, the common exit strategies and why they are important.
Common Exit Strategies
The borrowers offer some common exit strategies:
- Selling a primary property.
- Refinancing (long-term mortgage).
- Fix and Flip.
- Inheritance.
- Cash Redemption.
- Selling a secondary property.
- Selling investments.
Selling a Primary Property
Bridging loans are secured against a property. As an exit strategy, the property used as a security for the loan is sold. This property should be on the market on or before the completion of the bridging loan. The lender requires proof; it can be provided on the agent’s website by selling the property and sharing its link with the lender. The agent can regularly provide marketing updates to the lender, especially when the loan term is about to end. Selling property is the most common and simplest exit route the borrowers adopt while applying for bridging loans.
Refinancing to Long-Term Mortgage
Another popular exit route for bridging is refinancing to a residential or buy-to-let mortgage. This exit plan should be realistic when you are applying for this loan. As proof, an agreement in principle (AIP) from the new lender can be shared with the bridging lender. If this agreement is unavailable, the bridging lender can be shown the criteria of the new lender available through the website. That can serve as eligibility proof that the borrower fits the new criteria.
Fix and Flip Exit Plans
Fix and flip exit plans can be used by developers or those with renovation/refurbishment plans. Buyers purchase a property, develop or renovate it, and put it on sale/rent to generate profit. With this profit, the loan can be repaid. But the lenders need to assess the development work needed and the demand for property in the market.
Selling Shares or Investments
If you are considering selling other investments to be used as an exit strategy, you need to prove that the items you are going to sell are valuable and liquid. This exit route can be chosen when items are tangible such as antiques, shares in a strong business, and classic cars.
Selling a Secondary Property
Opting to sell a secondary property is a trickier exit strategy. A secondary property is a property other than the primary property that is used as security for a bridging loan.
A secondary property as an exit strategy can be riskier as the lender does not have a charge on the property. In this case, the bridging lenders have no control over the exit. Thus, the lenders do not lend to repossess the property and do not rely on this property.
Bridging lenders may ask for a charge over the property that will be sold. If the borrower cannot provide it, some requirements must be met. Suppose a borrower is opting for this route, then certain conditions in the loan agreement will be updated with the agent.
Inheritance
Inheritance can be a good repayment plan. The bridging finance provider requires proof of its certainty in the form of probate documents, a copy of the will, or confirmation from the solicitor. As far as there is plenty of detail available, lenders consider this exit strategy low-risk.
Cash Redemption
The borrowers using cash redemption as an exit strategy must provide cash evidence within the term. This cash redemption can be in the form of a lump sum amount from pension or investment maturity.
Importance of Exit Strategies
It is crucial to have a repayment plan; otherwise, this short-term funding can be very expensive. Without an exit strategy, you will be rejected for bridging loans.
The borrower is supposed to repay the loan at the end of the term. Failing to repay may result in financial loss as your account can be placed in default. Also, you will have to face late payment penalties. Additionally, bridging is secured against the property; this property can also be repossessed, damaging your credit score.
The stronger the exit plan, the more chances there are of bridging loan approval and getting affordable rates.
Summing Up
Providing a lender with a credible repayment plan is crucial; the only option if your exit plan fails is to extend the loan with the existing lender, but the interest rates will be higher with more strict loan terms. The bridging lender may refuse to renew the loan. Therefore, it is better to have a well-planned exit strategy in place.
