Bridging loan exit routes
Bridging loans are short term loans and are therefore unsuitable as a medium or long term finance option. Bridging loans tend to charge a high monthly rate of interest making them an expensive long term method of finance plus bridging lenders require their money back in the short term because they will usually have other plans for the funds.
It is very important to have an exit route in place. Exit routes to repay bridging loan facilities are commonly the intention to repay the loan once a property sale has been completed or the completion of another finance facility.
Property sales can fall through, which is something that has been an increasing problem since the credit crunch. People buying a property can run into unexpected problems with their own mortgage facilities leaving them unable to complete and causing a sale to fall through. Also since the credit crunch the property markets have been severely hit meaning that selling property can take a lot longer. Bridging loans can be arranged on an open or closed basis. Closed bridging loans are when a sale completion date for the sale of the security property has been agreed and contacts have been exchanged. This would mean that the purchasing party has their funds in place and not only intend to complete the purchase but are also financial able to do so. Bridging lenders like this because it means their money is reasonably secure. At the other end of the scale are open bridging loans, this means that a completion date for the sale of the security property has not been agreed, indeed there may not even be an interested buyer. Therefore the time scale can only be estimated and the period of time that the bridging loan is required is unknown. Open bridging loans therefore have much more risk for the bridging lender and are often more expensive than a similar closed bridging loan.
Problems can arise when a bridging loan exit route is a new finance facility. This is because if there is a problem in setting up a new facility then there are going to be problems in repaying the bridging loan. Again since the credit crunch this has been a problem because the anticipated finance all of a sudden is not available, leaving an expensive bridging loan in place. When this occurs other finance options will need to be considered, which maybe more expensive than the original option and therefore could make the whole project unprofitable. Alternatively the property may need to be sold in order to clear the bridging loan, which again maybe a costly option.
It is very important to have a secure exit route in place before taking out a bridging loan. If the exit route is not secure alternatives and back up plans need to be closely considered in case of problems, especially if these back up plans could be costly.