Bridging loans are a great solution for people looking to ‘bridge’ a gap in finance over a short-term.
Mike Collins Mortgage expert and a finance specialist with more than 17 years’ experience in the industry, says: “Like any financial borrowing, there is a period where the loan has to come to an end.
“People can find themselves spiralling in debt because they don’t or can’t pay off the balance in full at the end of the term.
It’s important to note that with a bridging loan, it is high interest and only designed as a short-term loan, so having an exit strategy is crucial – and lenders will want to see this.”
Read on to find out more about the expiration of a bridging loan.
Bridge loan interest rates
Interest rates on bridging loans are high and can vary from lender to lender, and are dependant on your credit history too.
As they are short term, bridging loans usually charge monthly interest rates rather than an annual percentage rate (APR). This means that just a small difference in the interest rate can have a big impact on the overall cost of your bridge loan.
Interest is not always charged monthly. It could be deferred or rolled up (meaning you pay all the interest at the end of the loan with no monthly payments) OR retained, which means you borrow interest for an agreed period, and pay it all back at the end of the bridge loan.
It is sometimes possible to combine these options, e.g. switching to monthly interest from retained.
You should also remember there can be admin, broker or legal fees to pay on top.
What if I can’t pay the interest back on my loan?
When you pay monthly interest to your lender and you fail to pay, a lender will take issue.
Due to their short-term nature, a default process is quicker than it is for mortgages – and often made worse by the interest rates which are much higher than for an equivalent mortgage loan.
Late payments are deemed less serious than a payment missed altogether – that is where interest isn’t paid on the agreed date but is paid that month.
Default interest are high can be used when terms and conditions are broken. This is usually stated in the original lending documents that are signed before a loan is taken out.
What if I fail to pay the bridging loan back at the end of the term?
If you don’t or cant afford to repay the loan in full at the end of the term, this is a breach of your lending terms. A lender will may not accept your offer to keep paying the monthly interest.
This is why an exit strategy is imperative when deciding whether to take out a bridge loan.
Talk to your lender
Communication is everything. If you do find yourself in a situation where you’ll be unable to pay your interest or loan, approach your lender early and say you’re having trouble, they will appreciate the honesty.
If you tell your lender that you will meet the overdue payments by a certain time, you must or your credibility will be in jeopardy.