What Happens If You Cannot Repay Your Bridging Loan?
Bridging loans are a short-term financing solution used by property buyers and developers to cover gaps in funding. They are often used to secure a property quickly while waiting for a mortgage or other long-term finance to be arranged.
However, if a borrower is unable to repay their bridging loan by the agreed deadline, they may face serious financial consequences. Lenders offer various options, but failure to act swiftly can lead to significant penalties and even repossession.
Bridging Loan Extensions and Increased Costs
In some cases, lenders may agree to extend the loan term if the borrower is unable to repay on time. This extension can provide valuable breathing space, allowing time to secure funds from a property sale, mortgage approval, or another financing source.
However, extensions usually come at a cost. Interest rates may rise significantly, and additional fees for administration or arrangement can be charged.
According to the Association of Short-Term Lenders, extension fees typically range between 1% and 3% of the loan amount, which can add thousands of pounds to the overall cost.
Missed Payment Penalties and Rising Interest Charges
Bridging loans are already known for their high interest rates compared to traditional mortgages, and failing to meet repayment deadlines can make them even more expensive.
Once the agreed loan term expires, lenders may impose default interest rates, which can be significantly higher than the original rate. In some cases, this can mean interest charges doubling or tripling overnight.
Additional penalties may also be added, including late payment fees and legal costs incurred by the lender in chasing repayment. These escalating costs can create a financial spiral, making it even harder for the borrower to recover.
Refinancing or Rebridging Under New Terms
If the borrower is struggling to repay the loan, refinancing with another lender can be a possible solution. This involves taking out a new mortgage or long-term loan to cover the outstanding balance. However, securing refinancing can be difficult if the borrower's financial situation has deteriorated or if the property market has changed.
Rebridging is another option, where a new bridging loan is arranged to repay the original lender. While this can provide a temporary fix, it often comes with even higher costs, as the borrower is now seen as a higher-risk client. But if one of the reasons for your bridging loan is for refurbishment purposes and you need to complete the renovation, this may be the most viable option.
Interest rates and arrangement fees for a second bridging loan tend to be steeper, and the borrower must demonstrate a clear exit strategy to avoid repeating the same issue.
Risk of Repossession
If no viable repayment solution is found, the lender has the legal right to repossess the property used as security for the loan. This process can be swift, as bridging loans are structured with the property as collateral. Once repossession occurs, the lender will typically sell the property at auction or through an estate agent to recover the outstanding debt.
According to UK Finance, repossession cases linked to short-term lending have risen by 15% in the last year due to financial difficulties faced by borrowers. In many cases, properties are sold below market value, leaving borrowers with additional debt even after the sale.
Understanding the consequences of failing to repay a bridging loan is crucial. Borrowers facing repayment difficulties should seek financial advice early and communicate with their lender to explore all available options. Taking proactive steps can help avoid the worst outcomes and protect financial stability.
