The truth is that no reputable lender will advance a bridging loan without a clear understanding of exactly how they will be repaid. Consequently, a clear and concise exit strategy can often be more important to the application process than a client’s credit history. Given that these loans are a short-term funding solution, often available in days rather than months, rates generally reflect this premium level of service and a greater level of risk. They are more expensive than longer term mortgages and loans, particularly so if not redeemed by the agreed settlement date.
Bridging loans typically run for between 3 and 12 months although terms can be both longer and shorter. Many lenders will refund unused interest if loans are settled early so it makes sense to borrow for a slightly longer term than is needed rather than risk running out of time. By ensuring the loan is repaid before the end of its term it won’t go into default and won’t attract higher interest rates and late payment penalties.
Of course, for loans that go severely over term the consequences can be even more serious resulting in damage to the borrower’s credit history and even repossession and potentially serious financial losses. It pays to have an exit!
There is one main alternative to redeeming a loan and that is to extend it with the existing lender. Unfortunately, this is not always possible. The lender may well refuse to renew and even if they do agree it is likely to be at the expense of a higher interest rate and stricter terms for doing so. It is clearly preferable to have a well thought out redemption strategy in place from the outset.
The two most common exit strategies are the sale of the primary/security property or the refinancing of the loan to a longer-term mortgage lender. Of course, there are others such as the sale of other investments such as shares, the sale of a secondary property or even an inheritance.
The sale of the security is generally the most common and simplest exit route when applying for a bridging loan, but it is important to be realistic and even conservative about the anticipated sale price and timings.
Property sales can take longer than anticipated. Buyers can drop-out, chains can break and even unexpected pandemics can result in wildly fluctuating markets!
It may also be the case that the bridging lender insists the property is on the market, sometimes even before they will lend against it! If the property is being refurbished prior to marketing the lender will probably look to agree a date by which the property is on the market and this date, as well as regular marketing updates, may even be built into the terms of the loan. Oversight by the lender may also increase as the end of the loan term nears.
As mentioned above the other main exit strategy is based around refinancing. If the security is being improved, it is vital to leave enough time after works have been completed to secure longer term finance as an exit. Mortgages, be they traditional, buy to let or commercial, can be complex and time consuming to secure. Many different criteria points may need to be satisfied even before an offer is issued.
Mortgage lenders will generally insist upon an independent RICS survey or at the very least a drive-by or automated valuation to protect themselves and their borrower. Whilst this provides comfort for all involved it is yet another point to factor in from a time perspective.
As with any exit route the bridging lender will need to know that a refinance is a realistic option and to this end, they may well ask to see an agreement in principle (AIP) from a longer- term lender even before they complete their bridge. Where an AIP is in place refinance can be a relatively straight-forward exit route – even more so if a single lender is providing both the bridging finance and the longer-term exit!
Aside from the two main exit routes detailed above there are many alternatives.
The sale of a secondary property, other than the one used as security for the loan, can be a potential exit strategy. In truth some lenders will take a more relaxed view about this than others. Some will allow the borrower to handle the sale, others may be far more hands on and for some lenders this may not be an acceptable exit strategy at all.
If the sale of shares, investments or assets is the preferred exit strategy the key to success is convincing the bridging lender that these assets have a reliable value, are genuinely liquid and that they will be sold within an agreed timeframe.
Finally, if an inheritance is being used as the exit strategy, the bridging lender will need to see proof, usually in the form of a will, probate documents or confirmation from a solicitor. The lengthy timescales of probate can make many lenders wary of inheritance as an exit route but there are specialist probate lenders who are well equipped to assist in this area.
If time runs out to secure a satisfactory exit and an extension is rejected some borrowers will turn in desperation to a re-bridge. No borrower should ever enter a bridging agreement with the planned exit being another bridge. This can be extremely expensive with setup costs being paid for a second time in a very short period and potentially higher rates of interest being charged. Profit and equity can quickly be eaten away in a re-bridge scenario
Bridging lenders will clearly accept a range of exit strategies but whichever is chosen it is vital for the borrower to be realistic about timescales and wherever possible to build in additional comfort by taking a slightly longer-term bridge than is needed. Close and pro-active communication with the lender throughout the life of the loan will also be very helpful.
Development exit finance enables property developers to react flexibly to changing situations, and to restructure their financial commitments to maximise profits
Development exit finance is used to repay outstanding finance against a property development once the project is complete. These loans are sometimes also known as Sales Period Loans.
When your existing development finance is coming to an end and sales can’t be completed in time a development exit finance loan can help you to refinance your current development loan. Development facilities often allow only a short-time period for sales and this can become even shorter if any construction delays have been encountered. Developers don’t want to sell their units under pressure or face extension fees with their existing lender. A developer exit loan can avoid extension fees and give you the time needed to market and sell the remaining units. By retaining greater control developers can effectively maximise the value of their developments.
Yes. As mentioned above it can help you to avoid extension fees but, even more positively, exit finance can often be obtained at a cheaper rate than your original development finance. Developers can often save considerably by switching to a developer exit loan when their site reaches or is approaching, practical completion. Fierce competition in the marketplace can also be a benefit to the developer with competition driving rates down in the months since taking out the original development loan.
In most cases yes. Development finance is inherently higher risk with the potential for delays and unforeseen issues. Rates are priced accordingly. Obviously, these higher levels of risk decrease as the project nears completion allowing development exit finance to be priced more competitively.
In common with most bridging loans exit loans can be obtained quickly – often within a 7-14 day’s timescale and sometimes even faster if the developer already has a recent valuation in place albeit many lenders will insist on instructing their own surveyor.
Whilst exit loans can be offered with monthly serviced interest payments for the vast majority interest payments are simply rolled up and paid off when the loan redeems. This obviously has a beneficial impact on a developers cashflow.
Unlike development finance where all sale proceeds are used to repay the loan amount, development exit lenders very often allow their borrowers to retain a proportion of the sale proceeds from each unit. Once again this is beneficial because it allows you to better control cashflow. Having said this 100% of any sales proceeds can be used to pay down the capital balance on an exit loan if this is preferred.
The obvious answer is as early as possible but ideally at least 1-2 months before your existing development finance expires.
Development exit loans can be completed on an extremely wide variety of property types, both residential and commercial, as well as a huge variety of ownership structures including offshore as well as UK based companies.
Amounts can vary from £100K up to £50M or potentially more on an exceptional basis. Some lenders are prepared to lend up to 80% of the developments value.
In general most development exit loans will fall between 0.5% and 1.5% per month although occasionally they can be either slightly cheaper or slightly more expensive. Each loan will be priced predominantly on loan to value (LTV), the strength of the development and the loan size.
A finish and exit bridging loan provides funds to finish a development as part of the exit plan by paying off the existing development finance loan. Usually, if a development overruns slightly, this just allows the finishing touches to be completed and then for the provision of a proper marketing period whilst the property or properties are sold. Indeed, sometimes these loans can be used on completed developments to provide a decent marketing period or time for a letting record to be established. Thus, the gross development value (GDV) of the project can be maximised or the longer-term finance options enhanced.
Given that these loans are usually written on a rolled interest basis and the sale of completed properties will provide the exit route applicants with bad credit are generally accepted. Lenders are more concerned with the strength of the developers proposition rather than any past difficulties provided of course that these are ring-fenced. The interest rate charged may be slightly higher to reflect the bad credit.
The quick answer is yes but historically many bridging lenders were at best reluctant and at worst completely unwilling to offer a new short-term loan to refinance an existing bridge. This situation has now changed and although some lenders still won’t consider refinancing an existing bridge there are many others that will take a more commercial view. To consider a re-bridge, competent lenders will seek to understand exactly why the previous bridge has not redeemed as planned and they will then need to be convinced that any subsequent loan they advance will be successfully settled on time.
A borrower that has gone past the scheduled repayment date of a bridging loan will know the answer to this question. Bridging loans are stereotypically sold as a dual rate product with a ‘discounted’ rate for a defined loan term of say 3,12 or even 24 months but if the loan then goes over the agreed term a ‘standard’ rate is usually applied. The standard rate will always be higher than the discounted figure, but they can often be substantially higher, sometimes doubled or indeed more. In such circumstances significant sums of additional interest can quickly accrue so a re-bridge can be a very useful option if a longer-term finance exit can’t be achieved.
It is unusual but unknown to find cases that have been re-bridged several times, with fees spiralling, equity being eaten away and still no clearly defined exit plan in place. These cases serve to underline the absolute importance of working directly and closely with experienced and ethical lenders. Good lenders will ensure positive borrower outcomes and that any re-bridge undertaken is a success.
When longer-term finance can be obtained to exit a bridge, whether this is a standard residential, commercial or a buy to let mortgage, the rates are likely to be more advantageous than anything that can be achieved via a shorter-term loan.
Re-finance to a mortgage is one of the most common forms of exit strategy for bridging loans but work needs to be undertaken to make this happen. This work often starts before even the bridging loan has been agreed! Before agreeing to a short-term loan where the proposed exit is longer term funding the bridge lender will usually ask for proof that the application will fit the proposed mortgage lenders criteria. This is generally done by showing the bridging lender an agreement in principle (AIP) from the mortgage lender. Where this can’t be produced the bridging lender may accept sight of the mortgage lenders criteria on their website as proof that the client fits their terms. When an AIP can be obtained refinance to a longer -term mortgage can be a relatively straightforward exit route.