What happens if you don’t repay a Bridging Loan on time?

Thursday 1st December 2022 | 7 minute read

If you fail to pay back a bridging loan on time, it can have serious consequences. But knowing your options and taking action quickly when you realise you're about to default can minimise the negative consequences that you'll face. 

As bridging loans are short-term, the default process is typically much quicker than mortgages, so time is of the essence if you're at risk of default.

This guide explains what to expect when you're unable to pay off a bridging loan, either when you miss a payment deadline, your exit strategy fails, or you default altogether.

Hour glass with time running out, laptop computer in the background

What's considered defaulting on a bridging loan?

Defaulting on a bridging loan occurs when a borrower fails to fulfil their obligations as outlined in the loan agreement.

The specific conditions for default can vary depending on the terms of the loan, but common instances of default include:

Non-Payment: Failing to make the required payments within the specified timeframe, including interest and principal.

Late Payments: Consistently make payments past the due date or exceed any grace period mentioned in the loan agreement.

Breach of Loan Covenants: Violating any bridging loan terms or conditions outlined in the loan agreement, such as providing false information, using the loan funds for unauthorised purposes, or selling the property used as collateral without the lender's consent.

Failure to Provide Security or Collateral: If the loan is secured against a property or other assets, not maintaining the required collateral or providing alternative security as agreed upon can be considered default.

Default on Other Loans: Defaulting on other loans or obligations can trigger a default on a bridging loan if it violates cross-default provisions specified in the loan agreement.

Failure to Meet Exit Strategy: If the borrower fails to execute the agreed-upon exit strategy for a bridging loan, which typically involves the sale of a property or securing long-term financing to repay the bridging loan.

It's important to note that the specific conditions for defaulting on a bridging loan will likely vary between lenders and individual loan agreements.

It is crucial for borrowers to thoroughly review and understand the terms and conditions of the loan agreement to avoid any potential default situations.

In case of financial difficulty or concerns about meeting repayment obligations, it is advisable to speak with your lender as soon as possible and seek professional advice to explore possible solutions or alternatives before defaulting on the loan.

What are the most common reasons for a bridging loan exit strategy failing?

While each bridging loan situation is unique, there are several common reasons why an exit strategy for a bridging loan may fail.

Some of the most common reasons include:

Delayed Property Sale: One of the primary reasons for a failed exit strategy is when the sale of the property takes longer than anticipated. Factors such as market conditions, buyer interest, or complications in the sales process can contribute to delays, making it challenging to repay the bridging loan on time.

Inability to Secure Long-Term Financing: If the borrower's plan is to secure long-term financing, such as a buy-to-let mortgage, to refinance the bridging loan, difficulties in obtaining financing can disrupt the exit strategy. Issues such as changes in the borrower's financial circumstances, tighter lending criteria, or a decline in property value can impact the ability to secure long-term financing.

Valuation Discrepancies: If the property's value is lower than expected during the exit strategy planning, it can result in a shortfall in funds required to repay the bridging loan. This can occur if the market conditions have changed or if the property's condition is worse than originally assessed.

Unforeseen Property Issues: Discovering significant property issues or structural problems during the redevelopment of the property or the sales process can lead to delays or complications in selling the property. In such cases, additional time and resources may be required to rectify the issues before the property can be sold, impacting the exit strategy timeline.

Changes in Personal or Financial Circumstances: Unexpected changes in the borrower's personal or financial circumstances, such as job loss, business difficulties, or changes in creditworthiness, can make it challenging to execute the planned exit strategy and repay the bridging loan.

Market Fluctuations: If there are significant fluctuations in the property market, such as a decline in property prices or a slowdown in buyer demand, it can affect the ability to sell the property within the expected timeframe and at the desired price.

To mitigate the risk of a failed exit strategy, borrowers should carefully assess and plan for potential challenges, maintain open communication with the lender, and consider alternative backup plans.

What are the typical outcomes for not paying back your bridging loan on time?

Here's what typically happens if you don't repay a bridging loan as agreed:

Let's take a look at each of the outcomes in more detail.

Late Payment Charges: Initially, the lender may impose late payment charges or penalties for each day or month that the repayment of the bridging loan is overdue. These charges can quickly add up and increase the overall amount you owe. You will have been given the terms of your bridging loan when you originally applied and signed contracts, so it's best to review these again promptly if you think you're likely to be unable to repay your bridging loan.

Default Notice: If the bridging loan remains unpaid beyond a certain period, the lender will issue a default notice. This notice formally informs you that you have breached the loan agreement and set a deadline for repayment.

Legal Action: If you do not respond to the default notice or fail to make the required payment within the specified timeframe, the lender may take legal action against you. This can result in a court judgment against you, which may require you to repay the outstanding bridging loan amount, along with any legal costs incurred by the lender.

Property Repossession: In most cases, a bridging loan is typically secured against a property or other high-value assets. The lender may have the right to seize or repossess the property to recover the outstanding debt. This can involve selling the property or assets through legal processes, such as foreclosure or repossession. It's common that lenders will want to recoup their money quickly, and as such lenders tend to prefer selling properties at auction. The downside for you will be that auction properties tend to sell for a lot less than when sold via estate agents.

Negative Impact on Credit Score: Non-payment or defaulting on a bridging loan will have a severe negative impact on your credit score in the same way defaulting on a mortgage or other loan would. This can make it challenging to obtain credit in the future and may affect your ability to secure loans or mortgages from traditional high street banks, limiting your future borrowing options to specialist alternative lenders.

Legal Consequences: If legal action is pursued and a court judgment is obtained against you, the lender may take additional steps to enforce the judgment. This can include wage garnishment, freezing bank accounts, or other legal measures to recover the outstanding debt.

How much are the fees if I miss a repayment on a bridging loan?

The fees for non-payment of interest on a bridging loan can vary depending on your loan agreement's specific terms and conditions.

It is essential to thoroughly review the loan agreement or consult with the lender directly to understand the exact fees and penalties associated with non-payment of interest. However, the potential fees that may be incurred in general are:

Late Payment Fees: If you fail to make the interest payment by the due date specified in the loan agreement, the lender may impose late payment fees. These fees are typically calculated based on a predetermined percentage of the overdue interest amount and can vary among lenders.

Default Interest: In some cases, lenders may charge a higher interest rate, known as default interest, when the borrower fails to make timely interest payments. Default interest rates are typically higher than the original interest rate and are applied to the outstanding interest amount that is overdue.

Additional Administrative Fees: Lenders may charge additional administrative fees for the extra work involved in managing and tracking late or missed interest payments. These fees can vary and may be assessed on a case-by-case basis.

It is important to note that the specific fees and penalties for non-payment of interest will be outlined in the loan agreement.

The terms of the agreement may vary depending on the lender, loan amount, loan term, and other factors. To have a clear understanding of the fees associated with non-payment, it is recommended that the loan agreement be reviewed thoroughly or consulted with the lender directly.

What options do I have if I can't repay my bridging loan?

If you find yourself unable to repay your bridging loan, it's crucial to take proactive steps and explore available options to address the situation.

Here are 6 potential options to consider if you find yourself unable to repay your bridging loan:

  1. Communicate with the Lender: Contact your lender as soon as possible to explain your financial situation and discuss your inability to repay the bridging loan. Lenders may be willing to work with you and offer alternative solutions, such as restructuring the loan, adjusting the repayment terms, or providing a temporary payment arrangement.
  2. Refinance or Extend the Loan: Depending on your circumstances, you may consider refinancing the bridging loan with a different lender or extending the loan term. This option can provide more time to sell the property or secure alternative financing to repay the loan.
  3. Sell the Property: If the bridging loan is based on a property transaction, consider selling the property to repay the loan. Engage a real estate agent to expedite the sale process and aim to sell the property at a reasonable price to cover the outstanding loan balance.
  4. Seek Financial Assistance: Explore other financial resources that may help you repay the bridging loan, such as borrowing from family or friends, liquidating other assets, or utilising savings or investments. Be cautious when using alternative sources of funding, as they may have their own risks and implications.
  5. Seek Legal or Financial Advice: Consult with a legal or financial professional experienced in dealing with bridging loans. They can provide guidance tailored to your specific situation and help you understand your rights, responsibilities, and potential options.
  6. Consider Debt Management Solutions: If you are facing multiple debts and struggling with repayments, you might explore debt management solutions such as debt consolidation, debt negotiation, or debt settlement. These options can help you manage your overall debt burden and potentially make the repayment process more manageable.

It is crucial to act promptly, communicate openly with your lender, and seek professional advice to explore the best course of action in your specific circumstances. Ignoring the situation or defaulting on the loan without proactive engagement can lead to more severe consequences. Remember, every situation is unique, and it's essential to tailor your approach based on your individual circumstances and seek advice from qualified professionals.

Final thoughts

It is crucial to communicate with the lender if you are facing difficulty in repaying a bridging loan on time.

In some cases, they may be willing to negotiate a new repayment plan or offer alternative solutions to avoid legal action. However, it's always advisable to seek legal advice and explore all available options to address the situation promptly.

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