Bridging exit strategies

Why the exit matters to lenders

A bridging loan is repaid in one payment at the end of a short term. The lender is not relying on monthly repayments from your income, but on a specific event, usually a sale or a refinance, happening on time and for enough money to clear the balance.

That is why lenders treat the exit as seriously as the security. A good property with no credible way of repaying the loan is still a weak case. A modest property with a well-evidenced exit can be a strong one.

A credible exit has three features. It is realistic for the property and the market, it can happen within the term with room for delay, and it is supported by evidence rather than assumption. The sections below look at what that evidence looks like for each route.

Sale of the property

Selling the property is the most common exit for refurbishment projects, development exits and chain breaks. Lenders will want to know the expected price, how it was arrived at and how long a sale is likely to take.

• Comparable sales of similar properties nearby, ideally recent and in similar condition
• Agent opinions on price and marketing time
• For refurbishments, a clear link between the works and the expected value
• For multiple units, a sales plan and any reservations already in place

Remember that the sale must cover the full balance at the end, including rolled-up or retained interest, fees and selling costs. If the expected price only just clears the loan, a small price reduction could leave a shortfall, and lenders will notice. A margin between the projected sale proceeds and the redemption figure strengthens the case.

Refinance onto a mortgage

Refinancing is the usual exit for investors who plan to keep the property. The bridging loan is repaid with a buy-to-let, commercial, semi-commercial or residential mortgage once the property qualifies.

The question lenders ask is whether that mortgage is realistically available. That depends on several factors:

• The property meeting the mortgage lender's criteria once any works are complete
• Rental income meeting interest cover tests on buy-to-let, or trading figures on commercial property
• Your income and credit profile for residential or owner-occupied mortgages
• Any minimum ownership period before the mortgage lender will lend on the new value
• The expected valuation being supported by evidence

A mortgage agreement in principle, or a summary from a mortgage adviser setting out the likely terms, makes a refinance exit far more persuasive. It also helps you check that the numbers work before you commit to the bridge.

Other exits

Lenders also accept other exits where they can be evidenced. Examples include the sale of a different property, proceeds from a business sale, an inheritance where probate is in progress, or a development facility on land that is about to start construction.

For these, the lender will want documentary evidence that the funds will arrive and when. An estate in probate, for instance, would usually need details of the estate, the executors and the expected timetable. A development facility exit would need planning in place and indicative terms from a development lender.

A combination of exits can also work, such as selling some units and refinancing the rest. Where there is a primary and a fallback exit, explaining both gives the lender more confidence.

Choosing the right term

Delays are common. Works overrun, buyers withdraw, valuations take longer and mortgage lenders ask further questions. A term that assumes everything goes to plan leaves no room for any of this.

On most bridging loans, a few extra months of term costs relatively little, particularly where unused retained interest is refunded on early repayment. By contrast, if the loan reaches its end date unpaid, the lender may charge default interest, require an extension fee, or ask for the loan to be refinanced, all of which add cost and pressure.

As a working rule, estimate how long the exit should take, then add a realistic allowance for delay. We discuss the term with you as part of structuring the case, before any lender is approached.

If the exit changes

Plans change during a bridge. A property intended for sale may be better kept and let, or a refinance may become harder if rates move. If the exit changes, it is better to address it early. Lenders are generally more open to a conversation several months before the end date than in the final weeks.

Options include extending with the existing lender, refinancing onto another bridge, or switching to a different exit. Each has a cost, and the right choice depends on how much time is needed and the position of the property. Indicative quotes from our panel are a starting point for comparing them.

Exits on works and development projects

Where a bridge funds refurbishment or conversion works, the exit depends on the works being finished first. Lenders will look at whether the programme leaves enough time after completion for building control sign-off, valuation and the sale or refinance to go through.

On refurbishment projects with a refinance exit, the mortgage lender will value the property in its improved state. If the works add less value than expected, the new mortgage may not fully repay the bridge, so evidence linking the works to the expected value is important.

On development schemes, the exit is often a mix of unit sales and a development exit loan. A development exit loan repays the development lender once the build is complete, usually at a lower rate, and allows more time to sell. Considering this route at the outset helps you choose a development term that fits the build rather than the sales period.

Common questions

This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.