Bridging finance is a form of short-term loan, usually for a 12-month period. The risks are generally greater as there is less time to repay the loan and deal with any unexpected issues.
Any loan secured against your property will always come with a degree of risk, whether it is a bridging loan, a traditional residential mortgage or a buy to let mortgage. Ultimately, if you fail to keep up the payments your home could be at risk.
By understanding the potential risks, you will be better placed to evaluate your options in relation to bridging finance and ensure that you plan ahead effectively to mitigate any potential pitfalls.
There are five main risks associated with bridging loans:
Let’s look at each of these in a bit more detail.
Your planned exit strategy for a bridge—the way you’ll repay the loan and outstanding interest at the end of your term—is the most important aspect of the loan.
If your plan fails, you may be unable to repay the bridge on time, which will leave you liable for additional costs and ultimately your property may be repossessed. Where possible, it’s always a good idea to have a backup plan in case your original exit fails.
If you have chosen to pay monthly interest on your bridging loan (rather than electing to roll up or retain the interest payments), you will need to ensure that you have enough cash to make the monthly interest payments.
Please use our bridging loan calculator to see what the costs are likely to be.
If you fail to make the monthly repayments, the lender may add additional late payment fees and/or put you in default.
If you miss interest payments or break any of the terms and conditions of your bridging loan, the lender may decide to apply a default interest rate, which will be higher than the original rate of interest on the loan.
Details of the default rate are usually documented in the original loan agreement, which is signed before the loan is taken out.
If default interest is applied, it can quickly take away any profit from the deal, so avoiding any missed payments is key.
Where there has been a serious breach of the loan terms, such as living in a property you had previously confirmed would be rented out, the lender may choose to call the loan in early and demand full repayment. Failure to repay the bridge can also result in the lender repossessing the property.
When the property is then sold, you will still be liable for any shortfall if the funds raised don’t cover your full debt, leaving you open to legal action from the lender to recover any outstanding amount.
If you overestimate the value of your property in your calculations, then this will cause a problem when the valuation comes in short. This might mean you either have to abandon your plans or find additional cash at short notice.
Similarly, if your exit route is to refinance the property, it’s essential to carry out any refurbishments to a good standard in order to ensure that the final property valuation is enough to enable you to raise the required refinance. Otherwise, you could find yourself having to sell the property in order to exit the bridging loan.
Careful planning is the key to minimising the potential risks associated with a bridging loan. Once the loan is in place, you need to ensure that you stay on track with your plans, which will allow you to safely exit the bridge within the agreed timescale.
Knowing exactly how you will repay the bridge is the most important factor when it comes to minimising the risks.
Ensure your numbers stack up and build in a contingency for any unexpected costs that might occur along the way. If the numbers are tight, then it’s always a good idea to have a backup plan in case your original exit plan doesn’t deliver.
For Example: You take out a bridging loan to refurbish a property with plans to remortgage it, repaying the bridging loan once you receive the mortgage from the bank. However, the works don’t add the required value to the property to enable you to raise the required finance. In this situation, your alternative exit to the bridge could be to sell the property. This will enable you to clear the bridge and potentially make a small profit. Although it might not be your desired outcome, it will at least enable you to repay the bridge and move on to your next project without having a negative impact on your credit history.
By opting to roll up the interest payments into the loan, you can avoid the risk of missing monthly repayments if cash flow becomes tight. However, this will increase the amount you need to repay at the end of the loan’s term so it’s essential that you accurately factor this cost into your exit plans.
Related articlesLast updated: 23 August 2024 | © KIS Bridging Loans 2024