Bridging loans have become an increasingly popular financing solution in recent years, providing property buyers and investors with quick access to funds to seize time-sensitive opportunities.
But what happens when that short-term bridging loan comes due?
One of the most common “exit strategies” is to refinance and repay the bridging loan with a long-term mortgage, often a buy to let.
While using a mortgage to repay a bridging loan is a widely adopted approach, there are several important factors to consider.
In this article, we’ll explore the process, benefits, and potential drawbacks of this refinancing option, as well as offer tips to ensure a smooth transition from bridging finance to a longer-term mortgage.
Understanding Bridging Loan Exit Strategies
Bridging loans are designed to be temporary financing solutions, typically with repayment terms of 24 months or less.
This short time-frame means that borrowers need to have a clear plan in place to repay the loan before it comes due.
The three main “exit strategies” for a bridging loan are:
- Selling the property that the loan is secured against
- Refinancing the bridging loan with a longer-term mortgage
- Using other sources of funds, such as investment proceeds or personal savings
Of these options, refinancing with a mortgage is one of the most common and viable choices.
This approach allows the borrower to transition the short-term bridging finance into a longer-term, lower-interest loan that is better suited to their long-term property ownership goals.
The ability to demonstrate a reliable exit strategy is a key factor that lenders consider when approving a bridging loan application. Outlining how you intend to repay the loan, whether through a mortgage, sale, or other means, helps give the lender confidence in your plan.
In certain circumstances the lender may request proof that the new mortgage is actually possible. As well as their normal checks such as income and credit history, they may ask to see an Agreement in Principle (AIP), or equivalent.
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Using a Mortgage to Repay a Bridging Loan
The process of using a mortgage to pay off a bridging loan is relatively straightforward, but requires careful coordination and planning.
The key advantages of this approach are:
- Provides longer-term, lower-interest financing. Mortgages generally offer much more favourable interest rates and repayment terms compared to bridging loans.
- Gives you more time to repay the debt. Mortgages typically have 25-30 year terms, versus the 24-month bridging loan.
Of course, there can be some challenges as well.
Meeting the mortgage lender’s eligibility criteria, such as income requirements and credit checks, will be more stringent than the bridging loan application.
Additionally, you’ll need to ensure the property’s value supports the required mortgage amount through an independent valuation.
You will need to be aware that remortgaging a property within six months of buying it can cause some problems. The six month mortgage rule is used by many lenders and will affect the number of options you have when remortgaging.
Bridge to Let Finance
If you’re planning on buying an investment property that needs renovating then perhaps bridge to let finance could be useful.
It’s a product that combines a short-term bridging loan with a long-term mortgage:
Short-term bridging loan
Used for the initial purchase of an investment property where a long-term lender would refuse to lend due to the condition. This allows you to buy the property, with time to refurb it.
Long-term mortgage
When the property is finished, and ready for letting, the buy to let mortgage kicks in and repays the bridge.
explore bridge to let financeMortgage Options for Bridging Loan Repayment
When it comes to using a mortgage to repay a bridging loan, borrowers have several options to consider:
Residential Mortgages
These are the most common types of mortgage, designed for owner-occupied residential properties. Eligibility is based on factors like income, credit history, and the property’s value.
Buy-to-Let Mortgages
For investment properties, buy-to-let mortgages offer financing based more on the property’s rental income potential than the borrower’s personal finances.
Holiday Let Mortgages
Holiday let mortgages are suitable for Airbnb styles properties that are let out to guests and holidaymakers. The mortgage is calculated using an average of the gross rental income as a short term holiday let.
Specialist Mortgages
There are also more niche mortgage products available, such as those for Houses in Multiple Occupation (HMOs), commercial properties, or properties with unique characteristics.
The specific mortgage product you qualify for will depend on factors like the property type, your financial situation, and the lender’s criteria. Working with an experienced mortgage broker can help you sort through the options and secure the most suitable refinancing solution.
Repayment using another bridge
There may be times when it’s not possible to secure a long-term mortgage. To get some additional time you should first approach the bridge lender and see if they can extend the term. If this is not an option then a Refinance Bridging Loan could be one solution. It’s the bridging version of a remortgage where you move the debt to another lender, on different terms.
Timing and Coordination
Timing is important when it comes to repaying a bridging loan.
Bridging loans typically have short 3-24-month terms, so you’ll need to ensure the mortgage application and approval process is completed before the bridging loan term ends.
This coordination is critical to avoid any gaps in financing or potential penalties for late repayment of the bridging loan.
A qualified mortgage broker can help you manage this process, liaising with both lenders to ensure a seamless transition from the short-term bridging finance to the long-term mortgage.
They can also advise on the optimal timing for each step, such as when to apply for the mortgage decision in principle, schedule the property valuation, and initiate the final mortgage completion. This level of planning and communication helps mitigate any delays or issues that could jeopardise the refinancing.
Risks and Considerations
While using a mortgage to repay a bridging loan is an effective strategy, it’s important to carefully consider the potential risks and downsides:
Mismatch between Bridging Loan and Mortgage Amounts
There may be a shortfall between the outstanding bridging loan balance and the mortgage amount you qualify for, leaving you to cover the difference. When you repay a bridge loan you need to budget for the original debt, accrued interest plus any fees added to the loan.
Property Value Fluctuations
If the property’s value declines between when you took out the bridging loan and the mortgage completion, it will impact the loan-to-value ratio and your ability to secure the required mortgage.
Mortgage Eligibility Criteria
Meeting a mortgage lender’s income, credit, and other eligibility requirements is generally more challenging than the bridging loan application.
Overall Costs
You’ll need to carefully consider the total costs involved, including interest charges, fees, and any early repayment penalties on the bridging loan.
Can you convert a bridging loan to a mortgage?
No, this is not generally an option.
Bridging loan funders rarely also offer long-term mortgages to convert to. They specialise in fast bridging loans and short-term finance only.
However, there are some lenders that offer a bridge to let solution. This combines a bridging loan with a long term mortgage as the exit route.
explore bridge to let financeNeed some help?
If you need a short-term bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To get matched with a specialist broker, please call us on 0330 030 5050.
