A bridging loan is a flexible short-term loan, and because it’s flexible, most bridging loans do not charge exit fees if you repay early.
A bridging loan charges interest for as long as it has not been repaid. The main reason to repay the loan as soon as possible is to save on interest payments.
Before committing to a bridging loan that you may be able to repay early, check that your loan offer does not include repayment fees.
Paying a closed bridging loan early
A closed bridging loan is one that has a fixed repayment date, but there is nothing stopping a borrower repaying the loan before the repayment date. It may be useful to regard the repayment date as the last day on which payment can be made before it is regarded as being overdue.
A closed bridging loan is usually cheaper than an open bridging loan because they are regarded as less of a risk. The borrower is required to show how the funds can be raised to repay the loan by the repayment date,
Paying an open bridging loan early
An open bridging loan does not have a repayment date, but will still be a short-term loan. For example, a 12-month bridging loan must be repaid on or before the end of the 12-month period. It is in the borrower’s interest to repay the loan early if possible in order to save on interest payments.
Why are you likely to be able to repay a bridging loan early?
There are several scenarios where a bridging loan can be repaid early.
Many bridging loans are taken out to fill the gap before more long-term finance is available. If you are waiting for a mortgage application to be completed, a bridging loan could be taken out to enable the completion of a property purchase before mortgage funds are available. Although a mortgage application can take some weeks, it is possible for the process to take less time than you think. In this case, as soon as funds are available, repay the bridging loan early.
Sometimes, a bridging loan is used to complete a home purchase because an existing home sale has not yet gone through. Many people rely on the sale of an existing house to fund all or part of the purchase of the new house. If the house is on the market but a buyer has not yet been found, a bridging loan can be used to purchase a new house before the existing house has been sold.
Homes can be for sale for a number of months before a buyer is found. However, some lucky homeowners put their house up for sale and a buyer turns up within a few days. If the buyer pays cash or has a mortgage offer already, the completion of the sale could happen quickly and the bridging loan repaid early.
Businesses often take out bridging loans to purchase stock in bulk at preferential costs. The bridging loan is repaid out of the sale of these goods. If the items experience a demand surge, they could be sold much quicker than anticipated, and the loan repaid early.
Sometimes a company can have a lot of unpaid invoices and a bridging loan can be raised on the basis that the invoices will be paid soon. Some companies then decide to offer early payment discounts and raise enough money to achieve this.
Open bridging loans are usually for periods of 12 months or less, but it is possible to obtain loans for three-year periods. Many developers use three-year bridging loans to fund building projects, with an exit strategy based on repaying the loan from the sale of completed properties. If the building work is completed quicker than expected, and buyers found, then the loan can be repaid in good time.
The exit strategy
To qualify for a bridging loan requires an exit strategy, which a plan for how and when the loan will be repaid. Borrowers need to be cautious when providing a time for when the loan will be repaid; the worst case scenario is when the money is not available to repay the loan either by the fixed date on a closed bridging loan, or before the end of the open bridging loan period. Lenders can impose large fees and penalty charges for late repayments.
If you take out a closed bridging loan, then it can help if the fixed repayment date is later than you expect to be able to pay back the loan. If going for an open bridging loan, make sure that you can repay the loan easily within the loan period.
Hopefully, all will go smoothly and you will be able to repay the bridging loan early. Property deals can be subject to delays, so you need to allow for this by hoping to repay a bridging loan early, but allowing enough time if this is not possible.
The first step
Bridging loans are flexible short-term loans that can be arranged quickly. They can be expensive in terms of interest and fees, but many businesses and individuals can find them useful. The shorter the loan period is, the less interest you pay. If possible, aim to repay the mortgage as early as you can.
If a bridging loan is suitable for your financial needs, your first step is to talk to an expert at Ascot Mortgages. We are in touch with a wide range of bridging finance companies and can match your needs to the best lender.
Loans are available from £25,000 to several million. Whatever the size of the loan, repaying early is the best strategy for saving money on interest payments.
Ascot Mortgages can advise you on loan periods and whether you should take out a closed or open bridging loan. We can help you formulate an exit strategy that means that you can easily repay the loan on time, or earlier if you manage to secure repayment funds more quickly than expected.