An exit strategy is a vital part of any bridging loan application. This guide outlines what an exit strategy is, why they are important, and the most common exit strategy examples.
What Is An Exit Strategy?
An exit strategy is a plan for paying back your bridging loan to the lender before the end of the term. Your exit strategy must be credible and realistic no matter how you plan to use the loan, how much you want to borrow, and how long you borrow the loan for. A strong, viable exit strategy that clearly sets out how you will repay the loan is vital for a successful bridging finance application.
Why Is An Exit Strategy Important?
An exit strategy is important because how the loan will be repaid is a primary factor that a lender considers when determining your eligibility for a loan. Bridging loans are arranged for a short-term requirement, and the lender expects you to repay the loan within this set timeframe.
Lenders need to be completely confident that their loan will be repaid, so a clear and achievable exit strategy is essential. It is difficult to secure bridging finance without a feasible exit strategy because this indicates that there is a good chance that the borrower will fail to repay the loan.
The exit strategy is important because if it fails and you cannot repay the loan by the end of the term, your loan will default, you may incur higher interest charges and late payment penalties, damage your credit rating, and, in the worst-case scenario, your property will be repossessed, leaving you with serious financial loss.
Acceptable Exit Strategies
Lenders will consider a range of acceptable exit routes, however, in most cases, the exit strategy will be to either resell or refinance the security property.
Sale of Security Property
Selling the security property is the simplest and most common exit route. As an example, you could use a bridging loan to purchase a property, refurbish it to increase its value, then sell it to repay the loan. Alternatively, you could use a chain-break bridging loan to complete the purchase of a new property then use the sale of your existing property to repay the lender.
If a sale is your planned exit route, the lender will look at the time taken to sell properties in the area, the price the property is expected to sell for, and they may specify a date that the property must be on the market for. Also, keep in mind that sales often take longer than anticipated, so make sure you can realistically sell your property within your loan term.
Refinance to a Long-Term Mortgage
Refinancing the security property is a common exit strategy. For example, you could use bridging finance to purchase a property at auction, carry out renovations, then repay the loan by switching to a long-term buy-to-let mortgage and renting the property out to a tenant.
When refinancing as an exit strategy, a lender will perform due diligence to ensure that refinancing is realistic. They may check that your credit score is good enough to achieve refinance at the end of the term. They may also ask to see an agreement in principle from a lender as proof that this is a viable option and that you have refinancing in place ready to pay back the loan.
Alternative Exit Strategies
There are other exit strategies that lenders consider, some of these include:
- Sale of a secondary property
- Cash redemption from inheritance
- Sale of shares or investments
- Sale of other assets
- Cash redemption from a pension
Contact Crystal Bridging Loans today for further information about exit strategies, and our experienced advisers will provide expert advice on your options. We’ll help you compose a strong exit strategy that will secure the best deal for your circumstances.