If you’ve ever looked into getting a bridging loan, you may have come across the term ‘exit strategy.’

In this guide, we will discuss what an exit strategy is, why you would need one and what a good exit strategy may look like.  

What is an exit strategy?

An exit strategy is your plan of how you will repay your bridging loan. Essentially, you use it to show your lender you will be able to repay the loan.

Lenders carefully assess the viability of your exit strategy to ensure that you have a feasible plan for repaying the loan, minimising risk for both parties involved. Without having a clear plan, you will struggle to get accepted. So, it is a vital part of the process.

In addition, your loan will be secured against a property you own, so if your exit plan falls through, it could put your property at risk.

Why do you need an exit strategy?

Having a smart exit strategy is important for a few reasons. This includes:

  1. Financial stability: A solid exit strategy reduces the risk of default and further potential financial difficulties.
  2. Lender confidence: Lenders need assurance that you can repay the loan. A clear exit strategy shows your commitment and ability to do so.
  3. Efficient loan approval: A well-defined exit strategy can speed up the loan approval process, getting you the funds you need more quickly.

Without a valid exit plan, you will not be able to get the funds you need. A lender will not accept your application without one.

What are some of my options for an exit strategy?

There are many ways you can pay back your loan. Your circumstances, what you are using the loan for and other factors can affect the options you have for repayment.

Some of the most common exit strategies include:

  • Sale of a property: This is frequently used by investors with extensive property portfolios, and it involves using the proceeds from a property sale to pay off the loan. This is also a common situation for residential buyers, who are wanting to take a house off the market, before their current property has sold.
  • Refinancing: Often developers and investors will get a bridging loan to secure a property, renovate it, and then refinance it with a long-term mortgage.
  • Capital injection: Some borrowers may have access to other sources of capital, such as inheritance, investments, or business profits. They may use these funds to repay the loan.

How to develop a successful exit strategy

Developing a successful exit strategy requires careful planning. Here are some steps to consider to help you come up with an effective plan:

  1. Determine how you plan to repay the loan. You may be planning to sell a property, refinance your loan, or get the funds another way. Consider this carefully, as it is vital to getting accepted for a loan in the first place.
  2. You should thoroughly consider how long you would need the loan for before submitting any applications. If your plan is to sell your property, think about how long it may take to achieve this. Make sure you give yourself enough time.
  3. You should come up with a timeline of when you need to complete certain steps in order to repay the loan on time. For example, you could be planning to sell a property that you have renovated (also known as ‘property flipping’). You would need to think about when the renovations should be completed, when you would have to list it for sale, and when you would need to have sold it by.
  4. You should always plan for potential challenges or setbacks. Consider; what if the property market takes a downturn? What if your refinancing application is rejected? Having a backup plan in place can help your application, as it shows you are prepared for any eventuality.
  5. Seek out professional advice. Consult with financial advisors, mortgage brokers, or real estate professionals. They can provide valuable insights and help you make informed decisions.

Summary

An exit strategy is an essential part of any bridging loan application. It shows how you plan to repay the loan by the end of the term as set out by your lender. This gives the lender confidence that you can comfortably repay the loan. There are many different exit strategies out there, which include, selling a property, refinancing or accessing funds another way. You can set yourself up for success by carefully planning your exit strategy. Consider the terms of the loan, get a timeline for your plans, any contingencies, and talk to a professional before applying.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.