Find out exactly what happens and the next steps that you should take to avoid repossession
Taking out a bridging loan can provide a valuable source of short-term financing to help you complete a property transaction or bridge a temporary cash flow gap. However, these loans come with relatively short repayment terms, typically ranging from a few weeks to 12 months. So what happens if you find yourself unable to repay your bridging loan on time?
In this comprehensive guide, we’ll explore the potential consequences of defaulting on a bridging loan, as well as strategies you can use to try to avoid this outcome.
Understanding the Potential Consequences of Defaulting on a Bridging Loan
Failing to repay your bridging loan by the agreed deadline will likely constitute a breach of contract with the lender. This exposes you to several possible repercussions:
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Higher Interest Rates: The lender will probably impose a higher default interest rate, increasing the overall cost of your loan.
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Additional Fees Late payment fees, account review fees, and other charges may be applied
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Demand for Repayment The lender can demand full and immediate repayment of the outstanding loan amount
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Property Repossession: If you used property as collateral for the loan, the lender may repossess it to recover their money.
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Legal Action: The lender can take legal steps like obtaining a County Court Judgement (CCJ), issuing statutory demands, or filing for bankruptcy/liquidation.
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Credit Score Impacts: Defaulting could hurt your credit history and score, making future borrowing more difficult and expensive.
Clearly, the stakes are high if you miss your bridging loan repayment date. But the good news is that with proactive planning, you can often avoid ending up in default.
Strategies to Prevent Defaulting on Your Bridging Loan
If you anticipate having trouble repaying your bridging loan on time, here are some tactics you can try:
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Communicate Early: Contact your lender as soon as possible if you foresee difficulties repaying on schedule. Transparency may make them more willing to work with you.
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Accelerate Exit Strategy: If your exit strategy involves selling a property, take steps to accelerate the sale so you can repay the loan faster. Lower the asking price if needed.
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Consider Re-Bridging: Take out a new short-term bridging loan to pay off the existing one. This buys you more time.
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Explore Refinancing: Check if refinancing to a longer-term loan may be feasible to replace the bridging loan.
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Add Collateral: Discuss using additional collateral to secure an extension if your initial collateral won’t suffice.
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Seek Professional Help: Talk to an advisor about managing the loan and minimizing default risk.
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Negotiate with Lender: Directly ask your lender about the possibility of an extension or modified repayment structure.
Acting quickly and negotiating in good faith with your lender can go a long way towards preventing default on a bridging loan. Be proactive and don’t hesitate to seek professional guidance.
What Happens If You Do Default on Your Bridging Loan?
If you exhaust the above options but still end up in default, here is an overview of what may happen next:
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The lender will likely move quickly to exercise their rights to your collateral property. They may appoint a receiver to sell it and recover their money.
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Expect constant letters, calls, and visits from the lender demanding repayment of the loan. Threats of legal action are common at this stage.
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If your collateral is insufficient, the lender can obtain a CCJ against you personally and eventually move to enforce it through bailiffs, attachment of earnings, etc.
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For company borrowers, the lender may force you into insolvency via bankruptcy or liquidation proceedings. Your company’s assets can be seized and sold.
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Your credit file will show the defaulted loan and CCJ (if applicable), severely damaging your credit score. Other lenders will see you as high risk.
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Any guarantors or co-borrowers on your bridging loan will also be subject to the lender’s debt recovery efforts. Their credit could be ruined too.
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You may end up losing the collateral property, other assets, and possibly your home if the lender pursues enforcement vigorously via the courts.
Clearly, defaulting on a bridging loan can spiral into a financial nightmare fairly quickly. That’s why it’s critical to carefully consider repayment viability before taking on this type of high-risk, short-term borrowing.
Key Takeaways – Consequences of Not Repaying a Bridging Loan On Time
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Defaulting on a bridging loan will likely lead to higher interest, fees, demands for repayment, and property repossession.
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Act quickly to accelerate your exit strategy, negotiate with the lender, or find alternative financing if you foresee issues repaying on time.
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If default occurs anyway, expect legal action from the lender, major credit score damage, and potential loss of assets/property.
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Think very carefully about your ability to repay before taking out a bridging loan, as the consequences of default can be severe.
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Seek professional advice if you are struggling with your bridging loan repayments. This can help limit the damage.
Bridging loans fill an important niche for short-term financing but also come with considerable risks if used improperly or defaulted on. Understanding these risks upfront and actively monitoring your repayment capacity is essential. With prudent planning, bridging loans can be a useful tool rather than a fast road to financial ruin.
Additional Resources
For anyone currently dealing with bridging loan repayment issues, helpful resources include:
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Financial Conduct Authority: Information on your borrowing rights and dealing with lenders.
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Citizens Advice: Free debt and legal assistance.
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MoneyHelper: Free debt advice and money guidance resources.
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Financial Ombudsman: Resolve disputes with financial companies like lenders.
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StepChange: Expert debt advice and solutions.
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Business Debtline: Advice for small businesses struggling with debt.
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Business & IP Centre Manchester: Workshops and guidance for businesses.
Don’t hesitate to seek expert assistance if you are concerned about meeting your upcoming bridging loan repayment date or have already defaulted. The sooner you take action, the more options you will have. With the right help, bridging loan default does not need to be a financial catastrophe.
Calling in the loan
In more serious cases, the lender may demand full repayment of the loan, even if you have no clear way of doing so. Non-payment in this scenario can lead to repossession.
This is usually reserved for cases where the account has several missed payments or the terms of the loan have been badly broken. Common examples are where you start living in a property that you said would be let out, or you’ve begun heavy refurbishment works that were never disclosed to the lender.
This practice is more common for unregulated bridging loans than regulated, where you’re offered a greater degree of protection.
Liquidators are used where the loan is taken by a company. They are appointed to get the lenders money back and will wind up the borrowing entity to do so.
Their focus will be on converting any assets in the business into cash – which means selling the security property.
This is a very serious approach and won’t usually happen until you’ve been given time to get things back on track.
What happens if I can’t pay my bridging loan interest?
If you’re unable to pay your bridging loan interest, where your bridging loan is serviced monthly, you will fall into arrears with your lender and breach the terms of the agreement. Much like with a standard mortgage.
Falling into arrears means that the loan balance, and therefore the loan to value increases. This is because the unpaid interest is outstanding and added to the redemption balance.
Due to the short-term nature of bridging loans, the default process tends to escalate quicker than it would for mortgages.
This is often made worse by the fact that bridging finance interest rates are higher than when compared to a standard mortgage. This is because if the interest rate is higher, a larger amount of interest is added to the loan. This in-turn eats away at the equity at a much faster rate meaning the lender needs to act quickly, otherwise they may face making a loss on the loan.
The process of handling missed payments can be more predictable for regulated bridging loans than unregulated finance. This is because FCA regulated bridging loan lenders must abide by the rules of the financial conduct authority (FCA), whereas unregulated bridging loans don’t offer the same protection.
A late payment is usually less serious than a missed payment. That is where the interest is paid within the same month that is it due, just not on the agreed payment date. A missed payment is when the payment has been missed altogether and is slightly more concerning.
That said, there are certain steps that can be taken to give yourself the best chance of coming out the other side relatively unscathed.
What Happens if You Default on The Bridging Loan – Property Finance Q&A
FAQ
What happens if you can’t pay off a bridge loan?
If you are unable to repay the loan when immediate repayment is demanded, the lender may seek to repossess the property over which the loan is secured. If the loan remains unpaid, bridging lenders are likely to have several legal options at their disposal.
How do I get out of a bridging loan?
- Refinancing with alternative long-term finance, such as a mortgage.
- Selling the financed property for profit.
- Selling an existing property, such as the house you are moving from.
What happens if you default on a bridge loan?
Collateral. Like a traditional mortgage, a bridge loan is secured by the value of your home. Your current home acts as collateral for the bridge loan. That means that if you default on payments, the lender can foreclose on the home.
What is the danger of a bridge loan?
These loans are only for a small period, typically less than 12 months. They carry a higher risk of default and, therefore, attract a higher interest rate.