What happens if you can't pay your bridging loan back on time?

Bridging loans are only intended to be used as a short term option

Bridging loans have many uses, but they are only ever intended to be used as a short-term finance option, usually for a maximum of 12 months. Although bridging interest rates are much more competitive these days, they are still higher than the rates on most mid and long-term finance facilities. The rolled up or retained interest options on bridging loans also make them unsuitable as a longer-term facility.

Save costs by repaying your bridging loan as quickly as possible

In order to keep your bridging costs down you need to have the loan for as little time as possible. By taking proactive steps you can help to ensure that you can repay your loan early or on time, and reduce the risk of going over term. Depending on your exit plan, there are a number of steps that you can take to help:

If your planned exit is the sale of a property

• Don’t waste time, get your property on the market as soon as possible using a good estate agent.
• When you are considering offers, do your best to ensure that the buyer can complete quickly, as you don’t want to find yourself in the position where they drag the process out for months, and then possibly let you down at the last minute. Buyers who are in a position to proceed immediately are certainly preferable to those with long complicated chains.
• Similarly, a cash buyer is definitely preferable to someone who needs to apply for finance, as there is always the risk that they won’t have their application accepted.

If your planned exit is to refinance

• Check that you qualify for the refinance you require before taking out the bridging loan.
• Put your finance application in as soon as you are able to do so.
• Be responsive to any questions asked by the finance company and chase them up if they go quiet.
• Have a back up plan if there is a last minute problem with obtaining refinance, even if it is to sell the property instead.

If you are planning to repay your bridging loan by refinancing, then don’t hang about. You can be proactive by investigating refinance options before you take out the bridging loan, to ensure that you will be able to get the required finance when the time comes. Then once you have the bridging loan in place, as soon as possible you need to get on with applying for your exit finance to avoid any delays which will cost you more in interest charges, and worst case, could also cause you to go over term.

If you are undertaking works to raise the value of the property

If the loan is to be repaid following works to the property, such as a refurbishment or an extension, then get on with the works as quickly as possible. Any delays with builders or obtaining materials will add to your costs as the longer you have the loan for, the more interest you will have to pay. Before you draw the bridging loan, try to do whatever you can to get things organised, such as lining up builders, so that you can press on quickly as soon as you have purchased the property or raised the required funds.

Once the work has been completed, don’t hang around putting the property on the market or applying for the required refinance.

If you are planning on selling the property / land for planning gain

Buying a property or land with the intention of applying for planning permission and then selling for a higher price once this is granted, is known as planning gain. If this is your planned exit, then do your homework before you take out the loan and make sure you have as much of the paperwork done as possible, so that you can move quickly once you have completed the purchase.

Above all keep an eye on the project and don’t become distracted by other things as this will cause costly delays.

Reasons why your bridging loan might go over term

Failing to pay back your loan within the agreed timescale is a breach of the terms of your loan. But sometimes even the best laid plans hit problems which can cause unexpected delays.

Having a clear exit plan is essential for your bridging loan application, but if for some reason your planned exit doesn’t materialise, what are the implications of not being able to clear your loan by the agreed date?

Every case is different but there are a number of common reasons why your loan might go over term:

1. The sale of your property is delayed

   Even if you have found a buyer within the term of your loan, things can still go wrong, and buyers can drop out at the last minute. With mortgages taking around 3 months to arrange if you lose a buyer late in the day, the extra time to find another buyer and for them to then arrange finance, can push you over your loan term

2. If your exit is the sale of a high value property

   Higher value properties are likely to take longer to sell than more moderately priced properties. This is particularly the case if the property in question is valued above the market average for the area, as your potential pool of buyers will be greatly reduced.

3. Your planned works to the property may take longer than you had anticipated

   This could be down to encountering unexpected delays, such as issues with building regulations. Or you could find that you are let down by your builders or face shortages and long delays in obtaining certain essential materials, all of which could add months to your expected build times.

4. Personal issues

   Unexpected personal issues, such as an accident or sickness, can easily derail your original plans and mean that you are unable to exit your bridging loan within the agreed timescale.

5. Running out of funds

   However carefully you have planned your project, it’s still possible that something unexpected could arise, which adds to your costs and takes you over your budget. Even though you should always include a contingency fund in your calculations, this will only cover you so far. If you run out of funds this could bring your project to a halt whilst you find more money, and could also mean that you struggle to find the builders to complete your project when you are in a position to proceed again.

What happens if you go over term on a bridging loan?

Exactly what will happen if you go over the term of your bridging loan will vary from lender to lender and will also be dependent upon your own individual circumstances.

In theory, as soon as you go over the agreed term of your loan you are in default as you haven’t adhered to the terms of your loan agreement.

However, what action you are likely to face will largely depend upon whether your bridging loan is on a regulated or an unregulated agreement.

A regulated bridging loan is regulated by the Financial Conduct Authority (FCA) – this applies to any bridging loan taken out on a property that either you or an immediate family member, currently live in, or even if you used to or plan to live in the future. In these circumstances the bridging loan should have been written on a regulated agreement.

An unregulated bridge is one that is secured against property not lived in by the applicant or their immediate family. Plus, the applicant has not lived at the security property and does not intend to in the future. There are some exceptions, which mainly applies when the security property is semi-commercial and the living accommodation is less than 40% of the area of the whole property.

Unregulated bridging loans are not subject to FCA regulations, and will depend on the loan agreement and practices of the lender.

What happens if you default on a Regulated bridging loan?

Each lender will have their own approach to dealing with a loan that defaults, but with a regulated bridging loan their initial response is likely to be to talk to you to ascertain what problems you have encountered and what your plans are to redeem the loan.

The lender will consider the reasons why you have gone over term and will want to work with you to find a solution. For example, if you have over-priced the property, they will discuss lowering the price in order to obtain a sale.

They may also encourage you to review your original plans if you are having trouble delivering on them. If your original plan was to sell, then it may be that you can refinance instead to achieve a quicker exit. Alternatively, if you are struggling to obtain refinance, they may discuss changing your plans and selling the property instead to exit the loan.

If you do go over term then don’t panic, as what matters is how you handle the situation. Speak to your lender in the first instance to let them know what is happening. You should also speak to your broker who may also be able to advise and if necessary look at alternative refinancing options for you.

It is important not to ignore or avoid the lender. If you do this then their options will be limited and they are more likely to instruct debt recovery which can lead to repossession proceedings.

Talking to the lender about the problems and how you want to proceed is the best way. For regulated loans the lenders will usually be helpful. If they want to repossess the property then they will need to take you to court first. At court the Judges tend to be supportive of the borrower for regulated loans, which is one reason why the lenders like to avoid this. That said, even though you may go to court a number of times before a repossession order is awarded to the lender, it is possible for an order to be awarded on the very first visit. Therefore talk to the lender and avoid going to Court if you can.  

What penalties could I face for defaulting on a Regulated Bridging Loan?

Not all lenders will report a default to your credit record, but some will, which can have a long lasting detrimental effect.

The lender might agree to extending the term of the loan to give you more time, but they could also insist that you start to make monthly interest payments rather than allowing you to continue to roll up the interest on your loan. The lender may renew the facility for you which will most likely incur a fee – usually between 1 and 2%.

With a regulated bridge the lender may still decide to take you to court for breeching your loan terms, in which case you could find yourself liable for court fees and costs. However, the courts tend to be more supportive of regulated borrowers, especially if they can see that you are making genuine efforts to clear the loan. However, there is no guarantee of this, and you could find yourself facing repossession.

What penalties could I face for defaulting on an Unregulated Bridging Loan?

With an unregulated bridging loan, the risk of the lender taking remedial action is much higher than with a regulated loan. The types of penalties that you could face include:

• Charging default interest – a lender may charge you a higher rate of interest if you default on your loan, either by missing an interest payment if you have elected to pay monthly interest, or if the loan is not repaid by the end of the term. The new higher interest rate may be applied from the date of the default, or it could in some cases be retrospectively applied from the original start date of the loan, although this is less common with the main lenders. The arrangements about default interest are usually documented in the original lending agreement, which you will have signed before taking out the loan.
• Additional fees – if your loan goes into default the lender may charge you additional fees. This could be a late payment charge, which will usually be for a relatively low amount. However, some lenders may charge regular account review fees, which could be considerably higher, although again this is less common with the main lenders. If they agree to extend the term of the loan you could also be faced with renewal fees, which with some lenders can be substantial.
• Calling in the loan - if you have missed several payments on the loan or the terms of the loan have been seriously breached, then the lender could choose to call in the loan and demand full repayment. A serious breach of the loan terms would be something like undertaking heavy renovation work that you had not disclosed to the lender. If the loan is called in and you have no way to repaying the loan, the lender could repossess the property, but this is usually a last resort.
• Appointing liquidators – if the loan is in a company name, then the lender could appoint liquidators to wind up the borrowing company and seize assets to repay the loan, including the security property. A lender would normally only do this as a last resort, when all other avenues to get things back on track have been exhausted.

Some unregulated lenders may take immediate action if you default on your loan, without giving you the chance to rectify the situation. This could include adding default interest and instructing debt recovery or repossession immediately, as soon as you have gone over the term of the loan.

How to avoid problems with repaying your bridging loan

Keep in contact with the lender

Be proactive and let the lender know in advance if you anticipate any problems with repaying your loan, as they are more likely to be supportive if you have been honest with them. However, it’s important to then stick to any revised timescales that are agreed, otherwise the lender will lose confidence in what you say.

Speed up your exit strategy

If you have defaulted on your loan, then it’s important to find a way to exit the loan as quickly as possible. If the exit is the sale of the property, then consider reducing the price for a quick sale. Although this may reduce your end profit once the loan is repaid, this may still be better financially than the costs of continuing to be in default.

Consider re-bridging

A re-bridge can be arranged to repay an existing bridging facility that is reaching the end of its term or has experienced difficulties. If you had previously been paying monthly interest charges, moving onto a rolled up or retained interest basis could help ease the financial pressure to make payments each month.

Written By Holly Andrews