Refinancing a bridging loan can be a lifeline for property buyers or investors looking to extend their payment terms.
Whether it’s due to delays, unexpected higher costs or simply needing more time to secure a mortgage, refinancing your bridging loan can give you the breathing space you need.
Here, we look at what refinancing involves, why you might need to do it, and what the alternatives may be.
Why Refinance A Bridging Loan?
Bridging loans are designed to be short-term loans, often lasting between 6 and 15 months. They exist to ‘bridge’ a financial gap, usually during a property purchase.
Whilst they can be amazing tools for investors, the short nature of these loans, combined with higher interest rates, can cause problems if things don’t go to plan.
Here are some common reasons why borrowers might choose to refinance a bridging loan:
Extending The Term Of The Loan
If you’re getting to the end of your bridging loan, but haven’t yet completed your exit strategy, refinancing buys you more time. This could give you an extra 6 to 12 months to find a buyer, arrange a mortgage or complete any project.
Reducing Interest Rates
Bridging loans normally come with higher interest rates. If you have an opportunity to get a new loan with a lower interest rate, refinancing can help you bring down your overall borrowing costs.
Accessing More Capital
If your property project hasn’t gone to plan and you need more capital, refinancing allows you to borrow some extra money. This tends to be more common with property renovations or development projects, where costs can change regularly.
Avoiding Defaulting
Bridging loans are agreed with a set loan term. If you are unable to meet the repayment deadline, refinancing can help avoid defaulting on the loan and incurring hefty penalty fees.
This option gives you time to get your finances in order without financial penalties.
How To Refinance A Bridging Loan
Refinancing a bridging loan is a process that should be approached with caution. Each lender will have their own requirements, so it’s important to speak to your lender and prepare your application properly.
Here’s a step-by-step guide to help you through the process:
1. Assess Your Finances
The first step is to look at your existing loan. Understand how much you owe, the current interest rate, and what you need to repay. Think about whether you need to refinance and what you hope to achieve from it.
2. Research Potential Lenders
Not all lenders will allow you to refinance your bridging loan, and some may have strict requirements.
Research lenders who are experts in bridging loan refinancing or work with a bridging loan broker who can connect you with the best lenders.
3. Get Your Documents Together
Lenders will want to see detailed information about your existing loan and financial situation.
Prepare documents like your loan agreement, property valuations, proof of income and details of any other debts. The lender may also need to understand why the original loan is being refinanced and why it was not repaid as planned.
4. Submit Your Application
Submit your application to your chosen lender. The lender will likely want to assess your situation and the property being used as security. Be prepared to answer any questions and share extra information if needed.
5. Review The Offer
If your application is successful, the lender will share an offer that lays out the terms of the new loan.
Review this carefully, paying close attention to the interest rate, repayment schedule and any extra fees.
6. Complete The Refinancing Process
If you’re happy with the offer, you can sign and complete the refinancing process. Sign the new loan agreement and use the funds to pay off your existing bridging loan.
Are There Restrictions For Refinancing Bridging Loans?
Different lenders will have different criteria for refinancing a bridging loan. Make sure you look at the fine print to see if you qualify. Some lenders may impose:
- A Minimum Loan Period: Some lenders may need you to have held the original loan for a minimum period (e.g., 6 months) before refinancing.
- Purpose of The Loan: If the original bridging loan was for business or a non-residential property, not all lenders will allow you to refinance.
- Borrowing Limits: Some lenders might not want to refinance the full amount of your original loan or may want you to contribute some money to the debt as well.
- Credit History: Lenders may not want to refinance if your credit history has changed since taking out the initial loan, making you seem like an irresponsible lender.
What To Consider When Refinancing A Bridging Loan
Costs
Refinancing can comes with extra costs, including another round of arrangement fees, valuation fees and legal fees. It’s important to understand these expenses and weigh them against the potential benefits of refinancing.
In some cases, the costs may outweigh the advantages, making it more practical to explore other options.
Impact On Credit Score
Applying for a new bridging loan can have a negative impact on your credit score, especially if you make multiple applications within a short timeframe. Think about how this might affect your ability to secure long-term financing in the future.
Timing
The timing of your refinancing is important. Start the process well before your existing loan expires, so that you don’t come up against a last-minute rush. This gives you tons of time to research lenders, gather documents and negotiate the best terms.
What Are The Alternatives To Refinancing?
Extend The Term Of Your Existing Loan
Speak to your lender about extending the term of your existing bridging loan. They may be open to offer more time, especially if you have a good repayment history and a solid plan for settling the debt.
Switch To A Long-Term Mortgage
Look into switching to a long-term mortgage to pay off your bridging loan. This offers more stability and smaller repayments, making it easier to plan your finances.
Sell The Property
If you can, selling the property quickly can be an easy way to repay your loan.
Speak to an estate agent to help you make a quick sale if possible, to avoid having to go through another loan process.
Refinancing As A Final Solution
Refinancing a bridging loan can be a good solution if you need extra time or better terms for your property financing.
However, it’s important to consider the costs, criteria and repayments before starting the process. That way, you can make sure that you are refinancing responsibly.
