The Exit Strategy: How to plan for repayment of your bridging loan

By Alice Ingram 28th August 2024

Bridging loans are a popular financing option for those looking to bridge the gap between buying a new property and selling an existing one, or for other short-term financial needs.

While these loans offer quick access to funds, they also come with a crucial responsibility: repayment.

Given the short-term nature of bridging loans, having a solid exit strategy is essential to ensure that you can repay the loan on time and avoid potential financial pitfalls.

This article will explore the key tips and strategies to help you plan effectively for the repayment of your bridging loan.

Understanding the Importance of an Exit Strategy

An exit strategy is essentially your plan for how you will repay your bridging loan by the end of the loan term.

Since bridging loans typically have higher interest rates and shorter terms (often ranging from six to twelve months), a clear and realistic repayment plan is vital.

Without one, you risk facing financial strain, increased costs, or even the loss of the property used as collateral.

1. Selling Your Existing Property

One of the most common exit strategies for repaying a bridging loan is selling your existing property. If your loan was taken out to buy a new home before selling your current one, the sale of your old property will likely be your primary source of repayment.

Tips for Success:

Accurate Valuation: Ensure your property is accurately valued by a reputable real estate agent or appraiser. Overestimating the value can lead to delays in selling, while underestimating could mean you don’t have enough to cover the loan.
Market Timing: Pay attention to the housing market trends. Listing your property during a seller’s market can increase your chances of a quick sale at a favorable price.
Marketing: Invest in professional photography, staging, and effective marketing strategies to attract potential buyers quickly.

2. Refinancing with a Long-Term Loan

Another exit strategy is to refinance your bridging loan with a traditional mortgage or another long-term loan. This approach is particularly useful if you plan to keep the property you purchased with the bridging loan.

Tips for Success:

Mortgage Pre-Approval: Get pre-approved for a long-term mortgage early in the bridging loan process. This will give you a clear understanding of how much you can borrow and at what terms.
Credit Score Management: Maintain a strong credit score throughout the process to secure favorable refinancing terms. Avoid taking on additional debt or making late payments during this period.
Timing: Start the refinancing process well before the bridging loan matures. This will give you ample time to address any issues that may arise and ensure a smooth transition.

3. Using Other Assets or Investments

If you have other assets, such as savings, investments, or additional properties, you can use these to repay your bridging loan. This strategy is useful if selling your property or refinancing is not feasible or if you want to retain the property.

Tips for Success:

Asset Liquidity: Ensure that the assets you plan to use are liquid or can be quickly converted to cash. For example, selling stocks or other investments may take time, so plan accordingly.
Tax Implications: Be aware of any tax implications that may arise from liquidating investments. Consult with a financial advisor to understand the impact on your overall financial situation.
Backup Plan: Have a backup plan in place in case the value of your assets decreases or if you encounter delays in accessing the funds.

4. Selling the Newly Purchased Property

In some cases, borrowers take out a bridging loan to purchase a property with the intent to sell it quickly for a profit. This strategy, known as property flipping, can also serve as an exit strategy for repaying the loan.

Tips for Success:

Renovation Planning: If you plan to renovate the property before selling, have a clear budget and timeline. Delays in renovations can impact your ability to sell on time.
Market Research: Conduct thorough research on the property market to ensure there is demand for the type of property you are selling. Price the property competitively to attract buyers quickly.
Contingency Fund: Set aside a contingency fund to cover any unexpected costs or market fluctuations that could delay the sale.

5. Re-bridging

In some situations, you might consider taking out another bridging loan to pay off the first one. This approach, known as re-bridging, is typically used as a last resort when your original exit strategy is delayed.

Tips for Success:

Cost Consideration: Be aware that taking out a second bridging loan can be expensive due to additional interest and fees. Only consider this option if you are confident that your original exit strategy will materialise soon.
Short-Term Focus: Treat the second bridging loan as a very short-term solution. The goal is to resolve the situation quickly to avoid further financial strain.
Professional Advice: Consult with a financial advisor or mortgage broker before pursuing this option to ensure it’s the best course of action for your circumstances.

Planning your exit strategy for repaying a bridging loan is not just important—it’s essential.

The key to success lies in careful planning, realistic expectations, and having a backup plan in place.

Whether you’re selling a property, refinancing, or using other assets, being proactive and prepared will help you avoid potential pitfalls and ensure that your bridging loan is repaid on time.

By taking the time to develop a solid exit strategy, you can confidently navigate the complexities of bridging loans and achieve your financial goals.