If you’re looking for a fast and flexible way to finance a time-sensitive property deal, you might want to consider a bridging loan. But, if you want lenders to approve your application, you need to showcase a strong, well-thought-out exit strategy. This is how you tell the lender how you’re going to repay the loan, and it encourages them to approve you quickly, offer lower interest rates and provide higher loan-to-value (LTV) loan options. If an exit strategy is vague or unrealistic, lenders tend to tighten terms, or they might even decline the application entirely.
Below, we’ve taken a look at the main exit strategy types, including sale, refinance and developer exits. Whether you’re a first time investor, an experienced landlord or a developer planning short-term finance, our guide is sure to help. You may also want to look at, can you get a bridging loan without an exit strategy
What is an Exit Strategy in Bridging Finance?
An exit strategy refers to the method you’ll use to repay the bridging loan before the end of the term. It’s what lenders want to see, as they need the reassurance that you have a strong repayment plan in place. There are three main typical bridging loan exit strategies in the UK; sale exit, refinance exit and developer exit. Lenders assess your exit before approving the loan and will base lending terms on the time required to achieve the exit, market demand and valuation evidence, your experience and financial position and how reliable your supporting documentation is. A clear exit strategy is a big factor in determining loan cost and how quickly your loan request is approved.
Sale Exit Strategy
A sale exit is the simplest and often the fastest form of repayment for a bridging loan. It works best when your intention is to buy, improve and sell within the bridge term. This type of exit tends to be used for auction purchases, refurbishment projects, buying structurally sound properties with cosmetic issues, and situations where the property is bought below market value. It’s also a common solution for those looking to downsize or upsize their home.
When a Sale Exit Makes the Most Sense
A sale exit is usually the best choice when local buyers are active and similar properties sell quickly, light-to-medium refurbishments that will significantly increase value, and you don’t want the commitment of a residential or buy-to-let mortgage. It’s also a good option if you already have estate agents and work plans in place. It’s a similar case if you’re seeking a commercial bridging loan.
How Lenders Assess a Sale Exit
Sale exits must meet strict criteria because the lender relies entirely on the property’s future market value. Lenders will take a wide range of things into account, including comparable sales evidence, realistic resale value, property condition, works schedule and local market demand.
Example of a Sale Exit
An investor buys a three bedroom semi-detached house for £190,000 at auction, and they budget £18,000 for cosmetic improvements. By looking at the local market, it’s clear similar refurbished semi-detached properties are selling at £260,000 to £270,000. The investor completes work in 10 weeks and sells in month five, repaying the bridge loan.
Refinance Exit Strategy
Another way of ending a residential bridging loan is with a refinance exit strategy. A refinance exit is used when you intend to keep the property long term, either to live in, rent out or use as a commercial asset. Refinance exits are common for unmortgageable properties, buy-to-let projects, HMOs, MUCs and properties requiring planning, compliance or structural work.
When a Refinance Exit Works Best
A refinance exit strategy works best if you want to retain the asset and benefit from rental yield, and if the property will be habitable and mortgageable once work has been completed. You need to meet basic mortgage affordability or rental stress-test criteria to secure a refinance exit, and your plan needs to involve releasing equity after the property value has increased.
What Lenders Require for a Refinance Exit
Refinance exits require more documentation, because bridging lenders want proof that a long-term lender will accept the property later. They expect you to have a Decision in Principle (DIP), a RICS valuation or projected GDV, rental income evidence and a decent credit history.
Example of a Refinance Exit
A landlord buys a derelict flat for £92,000 using a bridging loan, and they install a kitchen, bathroom, heating and flooring. The property becomes mortgageable and valued at £150,000.
They refinance onto a buy-to-let mortgage, repaying the bridging loan in month four.
Developer Exit Strategy
A developer exit is designed for developers and investors planning big refurbishment projects, and it’s often used when development finance is due to expire, units need more time to sell, cashflow is required for the next project or final approvals are still in progress. It’s also an option worth considering if Gross Development Value (GDV) has increased and equity release is possible. Developer exits are usually based on GDV, rather than current value.
How Developer Exit Loans Work
A developer exit bridging loan can be used in a number of different ways, including to refinance completed or nearly complete units, provide repayment of existing development finance, allow time to sell each unit at full market value, or to release developer profit sooner. It’s also an option if you’re hoping to avoid rushed sales at discounted prices.
What Lenders Check for Developer Exits
To determine whether your developer exit strategy meets lender requirements, they look at GDV, completion level and compliance evidence.
Example of a Developer Exit
A developer completes a block of 10 flats, and development finance is due to expire in 3 weeks.
Instead of forced sales, the developer refinances with a developer bridging loan at 70% of GDV, clearing the development loan and giving 12 months to sell the units individually.
Common Delays That Derail Exit Strategies
Delays can cause interest to accumulate or even force loan extensions, so you need to know how to avoid them.
- Planning Permission Setbacks – To avoid this, get advice before you submit your bridging loan application, and avoid assumptions about permitted development.
- Contractor Delays – Delays can be costly, which is why you need to use written agreements, stage payments and give penalties for delays.
- Unexpected Structural Problems – If you want to avoid unexpected structural problems, you need to get a structural survey early and budget a contingency.
- Mortgage Approval Issues – It’s a good idea to get a DIP early and ensure the finished property meets lender criteria.
- Overestimating Resale Value – You need to use realistic comparables and multiple agent appraisals to get the right resale value.
- Missing Compliance Documents – Missing compliance documents can cause huge delays, so be sure to stay organised and keep EPCs, electrical certs, FENSA, gas certificates and warranties in a digital file.
How Exit Strategy Strength Impacts Your Bridging Loan Rates
Lenders price bridging loans based on risk. As strong exit strategies reduce risk, they also reduce the lender’s offered rates. If you have a weak or unclear exit strategy, lenders are going to take a very different view. This can lead to higher interest, lower LTV, slower approval and even being declined altogether.
