A bridging loan is a straightforward solution for buyers and businesses needing cash flow during a transition period, usually when buying a new property and selling an old one. Bridging loans can be an easy way to get finance, but they are expensive, have high interest rates, and have strict repayment timelines. So what happens if you don't pay back a bridging loan?

This guide will outline the adverse impacts of defaulting, the course of action lenders typically take, and how to increase your chances of protecting your assets and reducing risk.

What Is a Bridging Loan?

Bridging loans are short-term finance products intended to assist people or businesses with short-term funding gaps, usually between purchasing a new property and selling their existing property. These loans are the most commonly secured on property to reduce the risk, so due to the increased risk and the short-term borrowing period, they will carry higher interest rates than a standard mortgage. This gap financing is offered for up to 12 months, and it is usually repaid by selling the property or securing longer-term funding.

What Happens If You Miss a Payment?

If your bridging loan requires monthly interest payments and one is missed, you're falling behind, similar to being in arrears on a mortgage. This generally counts as a violation of the loan terms.

If payments are missed: 

• The loan balance gets higher only because the unpaid interest is added to the total debt. 
• The loan-to-value (LTV) ratios are increasing, reducing the equity in the property. 
• The lender may charge default interest rates much higher than standard interest rates. 
• You may incur additional costs, such as late payment penalties or account review fees. 

If your loan has a rolled-up interest, which means all interest is paid at the end of the term, missing the repayment deadline means the full amount becomes due, and failure to repay constitutes a default.

The Consequences of Defaulting

Failing to repay a bridging loan can lead to serious financial and legal implications for the borrower. Here’s what typically happens in such cases:

1. Default Interest and Fees

Most lenders will generally apply a default interest rate, which can be significantly more than the original rate of interest, and this will typically be in the loan agreement. Market reports suggest default interest can add 2% to 4% on top of the current rate every month. Some lenders will impose administrative costs and fees, specifically if legal recovery action is sought. Those fees can quickly ramp up an outstanding debt.

2. Loan Called In

Suppose the loan has a balance outstanding and the borrower does not contact the lender, or even make something reasonable to communicate or resolve. In that case, the lender can "call in" the loan and require the borrower to pay the loan in full. This usually happens when the lender feels it is unreasonable to ask the borrower to exit the loan or if, from the lender's perspective, the property's equity is ultimately at stake.

3. Repossession

Repossession is usually a final measure. However, it can be a reality. Lenders may well repossess and sell the asset if delays reduce their chance to recover the loan, especially if the property's value is decreasing. This is more likely to occur with unregulated bridging loans because these don't provide consumers with the same protections as FCA-regulated loans.

4. Liquidation for Corporate Borrowers

If the loan is taken out in the name of a company, lenders may appoint liquidators to wind up the company and recover funds. This may occur through the forced sale of assets, including the secured property.

How to Avoid Bridging Loan Repayment Issues

Timely repayment of a bridging loan requires planning and management. Here are the main important tips to assist you:

1. Have a Strong Exit Strategy 

Lenders will evaluate the exit strategy when they decide whether they lend the applicant money. Whether selling a property or refinancing, you need to ensure that the exit strategy is realistic. Have a professional valuation performed and allow delays in dealing with solicitors when sales proceed.

2. Keep Lines of Communication Open 

If you think you may have issues with repayments, contact your lender at your earliest convenience. Most trustworthy lenders will agree to work with you only if you are honest and upfront about your situation. They are much more likely to assist if they see that you are putting in the effort to resolve your issues.

3. Re-bridge

If you require more time, a re-bridge will extend your repayment ability. A re-bridge involves a new bridging loan to repay an existing bridging loan. A new bridging loan could also be done on better terms, such as a loan with rolled-up interest instead of a monthly payment.

Conclusion

What if you can't repay a bridging loan? The implications can be severe, from further interest charges to legal enforcement or even repossession of your property. That's why it's important to form a repayment plan before you borrow in the first place. Not sure what steps to take next? Don’t stress—talk to the pros.

When it comes to choosing the right Bridging Finance Company, trust matters. With years of experience, Kinetic Finance offers transparent advice, quick approvals, and flexible repayment terms. Start your bridging loan journey with us today.