15th Dec 2021

Bridging loan exit strategies

Bridging loans chapter 3.

What is an exit strategy

An exit strategy is the plan that you agree upon to repay your bridging loan. Before the capital is released, you will need to have a clear idea of how and when they will repay the loan.

With a strong exit strategy, you can use bridging loans to solve a number of short-term financing issues.

Why exit strategies are necessary in bridging finance

Without a clearly defined exit plan, bridging loan lenders will be hesitant to lend to you. Therefore, it is essential that you have a comprehensive understanding of how you will repay your bridging loan.

Most bridging loan lenders will ensure that borrowers have a clear method of repayment. They will provide you with sufficient time to repay the loan and take into account the potential for unforeseen delays.

How to prepare an exit strategy

A successful exit strategy includes the following essentials:

  • A plan for how you will pay back the loan
  • A clear and achievable time frame for the loan repayment
  • Consideration of potential obstacles to the plan

Examples of bridging loan exit strategies

  1. Refinance to a longer-term mortgage

    This is a very common exit strategy for bridging loans. It is important to make sure that your plan is realistic. The lender will ask you to show that your application meets the new lender’s criteria. Typically, this is done by showing them the agreement from the new lender. If you are unable to show them the agreement, the lender may accept alternative proof that you fit the lender’s criteria. For example, you can use the lender’s criteria on their website.

  2. Sale of property

    This is generally the simplest exit strategy for property developers or investors trying to secure a bridging loan. You use the funds from the sale of another property to redeem the bridging loan. The lender will find the average time taken to sell similar properties in the location. This is to make sure that the loan term is realistic. The bridging loan lender can ask for regular marketing updates, particularly towards the end of the loan term. A possible obstacle to this exit strategy is securing a buyer.

  3. Fix and flip

    You intend to purchase a property, refurbish it and then use the profits to redeem the bridging loan. In order to use this exit strategy you need to consider the state of the market and the level of work that needs to be done. Preferably, you will have a comprehensive plan of when the work will be carried out, which also considers the potential for delays and contingencies. For this exit plan you will typically be searching for an open bridging loan with a period of between 6 and 12 months.

  4. Sale of other investments

    When using this exit strategy, it is important that the investments are liquid and have a reliable value. It is easier to use this strategy when the investments are tangible items, such as antiques or cars. To implement this strategy, you will need to prove the value of your investments and define when they will be sold.

  5. Cash settlements

    For this type of repayment you will provide a cash settlement within the loan term from another source. For example, this exit strategy can be used if you are receiving a pension lump sum within the loan term that can be used to redeem the loan.

  6. Development approval

    You intend to use a bridging loan until you can secure planning permission from local authorities. As you cannot be sure that you will receive this permission, it is essential that there is a type of backup plan in place for this exit strategy. This may include plans for a smaller renovation and resale. This will need to take into account the state of the market in this location.

Can you extend a bridging loan?

If your exit strategy has failed you can in some rare instances extend your bridging loan or apply for a rebridge. However, it is typically very difficult to secure a rebridge, so it is usually better to take into consideration the potential for delays when you are forming your initial repayment plan.

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