Having trouble paying your bridge back?
Re-bridging might seem like the answer but do tread carefully. Let’s look at whether paying one bridge off with another is an option for you.
Bridging has grown in popularity in the UK property market and is a short term funding solution for many things.
Loans are 3 to 24 months and are secured against property assets.
But what happens when you get to the end of your bridge and can’t pay it back? Can you pay a bridge off with another bridge?
This article looks at whether you can and what you need to know.
How Bridging Loans Are Repaid
Understanding how bridging loans are usually repaid will help us understand why re-bridging might be an option.
Generally, borrowers repay their bridging loans through:
Property Sale
The most common way is to sell the secured property. This is often used when buying at auction, breaking a chain or flipping a property.
Refinancing to a Long-Term Mortgage
Many borrowers use bridges as a stop gap while they arrange long term finance. This is common for properties that aren’t immediately mortgageable or when you need to act quickly to secure a property.
Completion of a Development Project
Property developers repay bridges by selling a completed development, refinancing based on increased property value or switching to a buy to let mortgage once rental income is established.
Business Sale or Large Cash Injection
Some commercial bridges are repaid through business sales, large contract payments or funds released from other investments.
These show that bridges are designed with an exit in mind.
When and How Bridge Loans Are Repaid
Unlike mortgages, bridges don’t have monthly repayments. The focus is on the exit and final repayment.
Bridges are repaid:
- At the end of the loan term
- When the exit strategy is achieved (e.g. property sale or refinance)
- Early if the borrower wants and the lender allows
The whole loan amount plus interest and fees must be repaid in full before the loan term ends.
What is Re-Bridging?
Re-bridging is taking out a new bridge to pay off an existing one.
This is not an exit strategy when first applying for a loan!
This is similar to a remortgage and can give borrowers more time to complete their project, secure long term finance or sell their property.
It’s often used when unexpected circumstances arise, such as construction delays, cost overruns or changes in the property market.
A builder might secure a 12 month bridge to buy and renovate a property. If the renovation takes longer than expected due to unforeseen structural issues the builder might re-bridge to extend their finance and complete the project.
Why Re-Bridging Might Be Necessary
Re-bridging may be required when borrowers can’t repay their original bridge loan.
Some common scenarios include:
- Project Delays: Construction or renovation projects take longer than expected due to unforeseen issues and go beyond the original loan term.
- Market Changes: The property market changes suddenly and the property can’t be sold at the expected price or within the expected timeframe.
- Funding Gaps: Long term finance falls through or takes longer to arrange than expected and the borrower needs more time to secure alternative funding.
- Unexpected Costs: Budget overruns eat into the funds set aside for loan repayment and more finance is needed.
- Failed Exit Strategy: The original plan to repay the loan (e.g. property sale or refinance) doesn’t materialise as expected.
- Economic Factors: Broad economic issues like recessions or credit crunches impact the borrower’s ability to repay or refinance as planned.
- Personal Circumstances: The borrower’s financial situation or personal circumstances change and they can’t repay on time.
A refinancing bridge can be the solution in these situations, giving more time to complete projects, sell assets or arrange long term finance.
How to Refinance a Bridge
The process involves applying for a new bridge, usually with a different lender, to pay off the outstanding balance on the existing loan.
The new loan has its own terms, conditions and interest rates. Borrowers must have a clear exit strategy for this new loan as lenders will scrutinise this during the application process.
Lender Policies on Re-Bridging
Re-bridging options are not available from all lenders.
Some specialist lenders will re-bridge, they understand that property projects can hit unexpected obstacles. Others will not, they will view this as a sign of financial distress.
Factors that will influence a lender’s decision are:
- Why the original bridge wasn’t repaid on time
- The borrower’s history and credit
- The current value and condition of the security property
- The viability of the exit strategy
A specialist broker will help you find the best options. Debt advisory specialists have access to a large panel of lenders and know who will consider your application favourably.
Regulated Bridging Loans
A regulated loan is on a property you live in, or intend to live in. These are regulated by the Financial Conduct Authority (FCA) and have a maximum term of 12 months.
You can’t repay these with another bridge where the total term exceeds 12 months.
Benefits of Refinancing
Refinancing can help borrowers who are struggling to repay:
- Avoid default: By getting a new loan to repay the existing one, borrowers can avoid defaulting on the current loan which could damage their credit rating and future borrowing ability.
- More time: A new arrangement gives more time to complete projects, sell properties or arrange long term finance.
- Flexibility: New loans may have more favourable terms or lower interest rates than the original loan depending on market changes or the borrower’s circumstances.
Risks and Disadvantages
However re-bridging isn’t risk free:
- More costs: Getting a new loan will incur extra fees and potentially higher interest rates, overall more expensive to borrow.
- Compound debt: If the underlying issues aren’t resolved, borrowers will get into a debt cycle, continually needing new bridges to repay old ones.
- Reduced equity: As interest and fees mount up, the equity in the security property will decrease.
Let’s say a borrower took out a £500,000 bridge at 0.7% per month for 12 months to buy a property to renovate. If they need to re-bridge for 6 months at 0.9% per month due to project delays they could incur an extra £27,000 in interest, not including any arrangement fees or other costs associated with the new loan.
Alternatives
Before opting for re-bridging, borrowers should explore other options:
Extending Your Bridging Loan
Some lenders will consider extending the term of an existing bridge, especially if the borrower has kept open communication and has a repayment plan. This will be simpler and potentially cheaper than getting a whole new loan.
Refinancing Options
Depending on the circumstances you may be able to refinance onto a different type of loan product. For completed commercial properties a commercial mortgage might be an option. For ongoing development projects you may be able to switch to a development finance product.
Asset Sales or Additional Security
In some cases selling other assets or offering additional security to the lender may be a way to part repay the loan or negotiate better terms. This could be selling non-essential equipment, liquidating investments or using other properties as security.
Working with a Specialist Broker
Specialist brokers (like us) give debt advice and guidance.
We can:
- Find lenders who will consider your application
- Help structure your application to address lender concerns
- Negotiate on your behalf
- Give you market insights and lending criteria.
Need some help?
If you need a short-term bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To speak with a specialist broker, please call us on 020 3488 5706
