How Do I Pay Off My Bridging Loan? A Complete Guide
How Do I Pay Off My Bridging Loan? A Complete Guide
You're considering taking out a bridging loan. But what happens when you have one? How do you pay it off? When is it reasonable to expect that you can pay it off. Find out here.
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Got a bridging loan and now you need to pay it off? Not sure where to begin or what terms to follow?
Bridging loan volumes are hitting a record high in today's market as more and more people see it as an effective financial tool for their short-term funding needs. Mortgage delays are the most popular reason for taking out bridging loans, but auction purchases are getting popular as well.
Like with any other type of loan, however, applicants also need to study it well and come up with a repayment plan first. Read on to see what options you have in repayment.
What is Your Exit Strategy?
Before you even apply for a bridging loan, you must form an exit strategy. How and when do you plan on paying off the loan?
Be wary of providing a timeline of when you'll pay off the loan, though; you'll incur large penalty charges and other fees when you make a late repayment. This might happen if the money you're looking forward to getting doesn't arrive at the expected date, or it doesn't arrive at all.
There are two types of bridge loans you need to know for planning your exit strategy: closed and open.
Closed bridging loans require a clear and concise exit route as part of your application. Open bridge loans, on the other hand, might not require applicants to show a defined exit route. Let's take a closer look at these types.
Closed Bridging Finance
This type is the most common bridge finance, and it has a higher rate of approval than open bridge loans. As a bridge loan is often a way to make a payment before the expected money for that transaction comes, applicants will only need to show that the money is coming. They will need to provide a fixed date for when they can pay off the loan.
For this reason, closed bridge loans' interest rates are also lower than that of open loans. This type gives lenders a greater degree of confidence in the repayment. The penalties for missing the payment, however, are serious.
When You Would Need Closed Bridging Finance
People often consider taking out bridge loans for purchasing a home when their mortgage loan is still under processing. It's grown into a 4 billion GBP industry. They might use it to secure a property before someone else does.
Note, however, that your credit score matters more in this regard. Lenders would want to see a high credit score, which means that your mortgage loan has a higher rate of approval. This then ensures that you'll obtain the money to pay off the bridge loan.
Another situation that might create the need for a closed bridging loan is when you are waiting for the release of inheritance money. If you have a fixed date for when you'll receive it but you need the money now, closed bridging finance is the way to go.
But what if you're unsure of the date? Then the other type might be what you need.
Open Bridging Finance
Open bridge loans are the right choice for when you're uncertain when your expected money will become available. They don't have set repayment dates, allowing for more flexibility.
For this reason, this type of bridge loans is more expensive. The uncertainty of repayment will put lenders at a high risk, which will then apply higher interest rates. This is also why some might be hesitant to offer open bridging finance.
It's important to note here that while this type of bridging finance is open-ended, it still has a short term. The terms are usually at 12 months or less, but some companies can offer 18 months.
Developers can even apply for three-year bridging loans, which they will then use to fund building projects. The repayment will then come from the sale of the properties.
When You Would Need Open Bridging Finance
Want to purchase a property but you're still selling your current house? Take out an open bridge loan, which can wait for the sale to complete before you need to repay.
This is preferable to closed bridge loans because the sale of a house involves a lot of factors that might delay the process. You might not have a buyer yet or you're not sure when you can pay it back.
Having a buyer lined up isn't a guarantee either. What if that buyer taps out? Taking out a closed loan because you were sure of that buyer will only result in hefty penalties.
You can also use this type of loan if your business has a lot of unpaid invoices from which you need the money as soon as possible. Because you might not be sure when your clients will pay those invoices, having flexibility in repayment terms is more beneficial in this case.
How to Pay for Interest
You have the exit strategy, but how exactly can you pay for the interest? How much does a bridge loan cost?
Well, that depends on the interest rates of the lender. The repayment of which has two options: monthly or retained interest. Choosing the former will have you paying the interest each month while the latter deducts the interest from the amount of loan you applied for.
For example, taking out a 100,000 GBP loan with an interest rate of 1% will have a 12,000 GBP after 12 months. Lenders can retain that 12,000 GBP from the start and only hand out the remaining balance, which is 88,000 GBP, to you.
What Happens if the Exit Strategy Doesn't Go as Planned?
Lenders will usually contact the borrower 3 months prior to the end of the term to see how the exit plan is going. If the sale of the property is still not on the horizon, for example, the lender might give some tips on how to get the exit strategy back on track.
If unforeseen circumstances messed up your repayment plan, don't hesitate to talk to the lender. Although getting the money back as per the agreed terms would be their priority, they will often be willing to create an action plan with the borrower.
How to Apply for a Bridging Loan?
Getting a bridge loan may be the solution to help you secure a new home. Why wait when the property you want could slip between your fingers? However, you also need to know how to pay it off and you can use this guide to close the deal.
Interested in getting a bridging loan or do you want to know more? Visit us now for more information and we can help you decide on the best solution that works for your financial needs.