The majority of properties in the UK are bought using mortgages, bridging loans are useful as a short-term option to ‘bridge a gap’.
However, no matter how well you budget, things can go wrong! Around 2% of adults in the UK are currently behind on mortgages, according to UK Finance. No one sets out taking out a bridging loan or mortgage unless they can pay it back but life isn’t always straight forward. Unexpected factors can mean you can’t pay your bridging loan within the agreed time. So, what do you need to do if you can’t pay your bridging loan?
What can lead to bridging loan repayment issues?
As with any loan, if you don’t repay your bridging loan in full at the end of the agreed term, it can lead to increased costs and interest. Unlike those forms of debt, bridging loans are a bit different when it comes to exiting the loan.
Bridging loans are usually secured on a particular exit strategy and it’s when those strategies hit a problem that repayment issues arise. There are many reasons why you may face problems repaying a bridging loan which can include:
- Property sale delays. Bridging loans are often used to buy a property before your current home is sold. If the buyer of your current property hits delays, then it may impact your agreed repayment date for your bridging loan.
- Renovations overrunning. If you have used a bridging loan to flip a property, then building issues can lead to renovations overrunning. From building regulations to materials shortages, even the best laid building plan can go awry!
- Personal problems. An accident or long-term sickness can easily upset your plans. As a result, you may not be able to pay back your bridging loan in full by the agreed term.
- Running out of funds. No matter how well you prepare, issues can lead to spending more than budgeted. This can include those mentioned, such as building delays unexpectedly increasing costs.
What if you can’t pay your bridging loan?
Failing to pay your bridging loan when the agreement term comes to an end is a breach of contract. The lender may agree to keep the loan running and you may be able to pay the interest monthly but some lenders may not agree to this.
If your lender allows you to keep the loan and pay monthly, they are probably going to need proof of income. This allows them to decide whether the extended repayment term is feasible. For example, if you are on sick leave with reduced pay and have been for some months, that could be a factor in their decision.
FCA rules mean regulated bridging loans are only offered for a maximum of 12-months. As a result, your exit strategy is key and your lender will consider this when assessing whether they extend your terms.
You must ensure that when deciding on your exit strategy, that you think ahead and assess any potential problems. You need to ensure the terms you’ve chosen are realistic. For example, if your bridging loan is to pay for refurbishing property, you must ensure the work needed can be completed within 12 months. If it’s a big job that needs planning approval, for example, a bridging loan may not be the best solution.
What happens if I default?
Each lender is different and they treat every situation differently. This highlights the kind of action lenders might take but the options open to them include:
Default interest
You may be required to pay default interest if you miss a payment or your loan’s terms are broken. These rates are usually higher than the original agreement.
Some lenders can even choose to retrospectively apply the default interest from when it was first taken out.
Additional fee charges
Some lenders will choose to charge additional fees if you default. It can be anything from a late payment fee to higher ‘account review’ fees, but they are less common.
Calling in your loan
The lender may demand you pay your loan in full – even if you don’t have a way of doing so. In this situation, you could see your property repossessed. Usually, this is reserved for the cases where several payments have been missed or the terms of the loan are seriously broken.
Regulated bridging loans often offer a greater degree of protection in these cases, however, be aware that your home may be at risk if you do not keep up repayments on any loan secured on the property.
Liquidators can be appointed
Some lenders may decide to use a liquidator to get their money back. This is only likely to be used if you’ve already been given time to get things on track but you’ve failed to do so, however, be aware that this is possible before taking out a bridging loan.
What do I need to know about bridging loans?
If you are considering a bridging loan, it’s always best to speak to an expert before making financial decisions. At Steel River Bridging Loans, we have years of experience in finance. Just get in touch for a chat with us today.
