As the name says, bridging loans are used to bridge the short-term gap between where you are and where you want to be when there is no other option to get there. For instance, when you want to buy a specific property, but are waiting for the sale of your existing home, then using bridging finance to buy your dream property is a great alternative.
Although the bridging loan is a life-saver for many property buyers, the most important part of the process is to have a solid exit strategy. When you apply for the bridging loan, any lender would want to know how you plan to repay the loan. No reputable lender will lend you the money without a clear understanding of how it will be repaid. Conversely, a concise and clear exit strategy can speed up the application process.
In this post, we will break down exactly what exit strategies mean along with suggesting the available options for home buyers and property investors.
What Is a Types Exit Strategy in a Bridging Loan?
An exit strategy is a plan that you present to the lender regarding how you will repay the bridging loan when the time comes. Bridging loans are designed to be short-term funding solutions for buyers who need quick access to funds. Although bridging loans are very useful, they can get a lot more expensive than a traditional loan. It is crucial to have a proper exit plan in place because, without an exit strategy, the lender may refuse your application.
Common Types of Exit Strategies
There are several ways you can exit the bridging loan. Before you apply for the loan, the lender may ask for further information. The stronger your exit strategy, the more chances you have to get your application accepted. Here are a few ways you can plan your exit strategy.
#1 Sale of the existing property
You have found a great deal on a home and you are worried that you might lose the deal. So, you plan to sell your existing home, but currently selling on the market is taking too long. Therefore, you finally decide to use the bridging loan to complete your dream property purchase, and then repay the loan when your existing home is sold.
Selling one property to pay for another is a common exit strategy. When selling the property that is kept as security, the lender may insist that the property is on the market on or before the completion of the loan period.
#2 Refinancing to a long-term mortgage
Refinancing the security property with a long-term mortgage is another common exit strategy for bridging loans. For instance, you have bought a property at auction and renovated it using bridging finance and now you want to repay the loan by renting out the property to a tenant or switching to a long-term buy-to-let mortgage.
While taking this route, every lender would want to know that this plan is realistic. They may check your credit score to know whether you are able to refinance at the end of the term. They may also ask for proof that the application is in accordance with the new lender’s criteria.
#3 Flip and sell
If you are planning to purchase a bit of run-down property with an intention to refurbish it and put it on the market for a higher profit, then the flip-and-sell exit route is viable. Here, the flip part means carrying out the renovation work using the bridging loan and transforming it into a habitable property. Then, selling it to repay the bridging loan as well as earn a profit.
But, before you plan this route, you need to consider two things – the level of renovation work required and the current state of the market. If the property requires a high level of refurbishment work and it doesn’t increase in value much even after the renovation, then it isn’t worth your time and money. Look for a property that increases in value after the renovation, which can cover both purchase and renovation costs.
#4 Development approval
This exit route is especially meant for property developers. You are a professional property developer and you want to purchase a development property and convert it into multiple residential plots for resale purposes. However, you haven’t received the planning permission yet, so the development lender is not ready to approve the loan.
Meanwhile, you can apply for the bridging loan while you wait for the approval of the development plans, so you don’t lose an incredible deal. Once the development plans are approved, you can go back to the development lender and apply for long-term finance. And, once you receive the loan from the development lender, you can pay off the bridging loan.
#5 Cash redemption
You have the cash to purchase a property, but the money is not immediately available. You are waiting for the investment maturity, inheritance or a pension lump sum. In this case, you can use bridging finance to purchase the property until the cash becomes available.
However, you will need to provide evidence of where the cash is and when it will become available to you. Lenders will approve the loan only if they are convinced that the cash will become available within the term of the deal and you will repay the loan on time.
Alternative exit strategies
• Sale of other properties
• Sale of business
• Dividends from the business
• Sale of shares
• Money from an inheritance
Bridging loan lenders accept a number of exit strategies, but whatever exit route you choose, you must demonstrate realistic evidence about how and when you will repay the loan. If possible build additional comfort by taking out a bridging loan in London for a slightly longer time than needed. Ultimately, the success of raising funds through bridging finance depends on how you plan to exit the loan. Contact BridgingFinance4U to know more about exit strategies and our professional advisors will provide expert advice on all possible options. Click to Blog