What Happens if You Cannot Repay Your Bridging Loan?
If you cannot repay your bridging loan, you will likely incur late fees and penalties – and in severe cases the lender could take you to court, appoint liquidators or repossess your property to recover their funds.
In most cases, if the sale of the property or the building work is delayed, the lender will just charge you additional interest for a few months until the project is complete. Otherwise the lender might take more drastic measures to recover their debts.
The implications of non-repayment include:
- Late fee (varies between lenders)
- Added interest (around 1% per month)
- Default interest rates (around 1%-2% per month)
- Account review fee
- Negative impact to credit score
- Refinancing of loan under new terms
- Court action (if applicable)
- Liquidation (if applicable)
- Repossession of property (if applicable)
What Happens When You Miss Your Bridging Loan Repayment?
The bridging loan will be due on a certain date and this is usually repaid one lump sum, or through refinancing of a new loan or mortgage under different terms.
Added fees – if the project is not yet complete, due to ongoing building work or a delayed purchase, your loan will go into arrears and you will incur a late fee and default interest rate – and the loan will continue to accrue the same monthly interest.
In most scenarios, the borrower will pay a few extra months of interest and default interest rates and then repay the loan in full upon exit.
The lender will always try to work with the borrower – Charging extra interest is more practical for the lender than going to court or through the process of repossession.
Impact to your credit score – The default will typically be noted on your credit report and this will make your overall credit score fall.
Account review – Some lenders may carry out an official account review, looking closely at the latest value of the property, with new renovations and upgrades in consideration. The lender may charge an undisclosed fee for this service which is obligated in the contract. The lender may adjust the terms of the loan accordingly to make it more affordable and likely to be repaid.
Liquidation and repossession – In more severe cases, if the entire project and overall deal has gone completely south, the lender may be forced to liquidate the company or consider repossession of the property to recover their losses.
Why Might Your Bridging Loan Overrun?
With bridging loans typically lasting from 12-24 months, the interest is usually rolled up and repaid in full upon exit.
However, bridging loans are often used for buying and fixing up properties. If you’re counting on selling the property to repay the loan or your construction work is delayed, it can be difficult to pay back the loan on the exact repayment date. Certainly, if you are undertaking some high value refurbishments or have had delays due to planning permissions, these are things that can set back the process by a couple of months (or years).
Other factors that might make the bridging loan go over term include having:
- Personal issues, such as bereavements in the family or divorces
- Falling outs or financial issues with builders, investors, solicitors and contractors
- Costs overrun and the project runs out of funds
What Are The Outcomes For Missing Repayment For a Regulated and Unregulated Bridging Loan?
The outcomes for defaulting will be slightly different with regulated and unregulated bridging loans.
With regulated bridging loans, there is more of a process to protect the borrower and the lender will run through steps to understand your current position and help you repay within a reasonable timeframe. Whilst default fees will still apply, the regulated lender might talk to you and understand your project and consider other options such as refinancing and selling the property in its current state.
With unregulated bridging loans, the lender can choose how they wish to recover their debt. Typical default fees and late penalties will apply, but they might wish to take more remedial action in the form of calling in the loan (requesting full repayment), appointing liquidators or demanding repossession.
It is important to know that repossession is costly to the lender and a timely process – and it is only approved after a court hearing. In most situations, the lender will prefer to charge a few months of additional interest and hope that the loan is exited naturally.
What Can You Do To Avoid Defaulting On a Bridging Loan?
Speaking to the lender as early as possible is always recommended – and by doing so, the lender may be able to assist you and come up with a flexible and affordable arrangement. By waiting too long or until the loan’s maturity, you may be left with fewer options. Similarly, ignoring any communication by email or phone with the lender may cause the late fees and court action to escalate when speaking openly can resolve this quicker.
If your bridging loan is repaid in full upon exit, taking measures to speed this up can be helpful. If the exit is based on the sale of your property, then making the price more attractive for buyers or higher good agents could help move this along quicker. You may also consider during the planning phase to give yourself around 3 months to sell the property once it is complete. To complete all the renovations and sell in the same month might be too optimistic.
Finally, the role of refinancing or rebridging a bridge is extremely common and popular. This allows you to extend the terms of your existing loan based on current market rates and today’s value of your property, which might have changed. Depending on the condition and status of your property and its development, the terms under refinancing may not be as favourable as before, but they may help you to avoid any penalties or remedial action.