A familiar term to many seasoned sellers, the “property chain” is a constant threat to the security of any property sale or purchase. The lack of freedom to move a purchase forward can paralyse an otherwise successful house sale, and is one of the leading causes of sales falling through. However, being caught in the chain is not always an inevitability; it is possible for homeowners to break out of the property chain with the cunning use of bridging finance. In this article we’ll discuss what makes bridging finance an attractive tool for chain-breaking, and how it can be used to save time and money.
It’s important to remember that a bridging loan, just like a mortgage, is secured against property, and if the borrower should fail to repay they face repossession of their property. It’s vital that anyone considering taking out a bridging loan seeks the advice of a reputable broker before proceeding, in order to assess whether bridging finance is the right solution in their situation.
Bridging finance is, as the name suggests, a way to bridge the gap between a payment coming due and funds becoming available to pay it. The main characteristics of a bridging loan are that it is secured against property, that it is usually of a sizeable amount (often starting around £10,000 and in some cases reaching up to more than £10 million), and that it is usually of a short term (commonly between 1-12 months). Bridging finance is one of the most flexible forms of finance available, and lenders work very hard to ensure that the needs of their clients are met; in many cases, a loan may be funded only a week after an application is submitted, which means that bridging finance is also extraordinarily quick to put in place.
Of course, there is a cost associated with bridging finance, and the interest on these forms of loan is usually charged monthly. This means that a bridging loan is typically more expensive than other forms of finance such as a mortgage, and reflects the fact that it is only intended to cover the gap whilst other forms of finance are put in place. Bridging lenders are almost universally flexible, and work with their customers to design a payment plan that suits their needs; almost all payments can be deferred until the end of the loan, allowing borrowers to keep their ongoing costs to a minimum.
So how can a bridging loan help you break free of the property chain? Well, because a bridging loan may be quickly put in place, it enables buyers to act quickly and buy a new property without waiting for their current one to sell. This means that sellers aren’t at risk of losing their ideal home simply because their existing property is slow to sell, and means that sellers aren’t put under pressure to accept a low price simply to complete the sale.
Let’s have a look at an example of how bridging can be used effectively and responsibly. A couple of pensioners are looking to downsize their existing home and move into a retirement home; they have their eye on the perfect bungalow in a seaside community, and have decided to put in an offer. They put their current house up on the market for £350,000, and offer £250,000 for their new home. Their offer is accepted, but they aren’t able to move forward with the purchase until their home sells - they’ve received several lowball offers which would cover the purchase of their new home, but it would mean losing out on tens of thousands of pounds. They know that their ideal retirement home is within reach, but if they can’t find a buyer soon they’re likely to be gazumped by another offer.
In this case bridging finance provides a solution; the pensioners are able to take out a bridging loan that covers the cost of buying their retirement bungalow. By using their existing property as collateral they are able to borrow the full £250,000 to move their purchase forward, and can start drawing up contracts. In fact, since they are in effect a cash buyer, it is even possible that they’ll be able to make a successful lowball offer on their new home.
Now that they’ve secured their new home, they’re not under so much pressure to sell their old house. Although they will still have to pay interest as long as the loan is outstanding, they’ve not been forced to accept a low price for their old property. After another month, the couple find a buyer who offers the asking price, and they complete the sale with no further complications.
Bridging finance providers are committed to minimising the risks of lending, and will test the “exit strategy” of each of their clients to ensure that they have a viable repayment plan. In the case of our pensioners, their exit strategy was the sale of their existing property. The lender would look at the value of their property and whether it was likely to generate the required amount of income upon sale; in this case, as the property was worth considerably more than the loan, it is a strong exit strategy. Most chain-breaking bridging loans will use the sale of a property as an exit strategy, but any sound plan for generating income can potentially constitute an exit strategy.
The Financial Conduct Authority is responsible for overseeing owner-occupier mortgages, and any bridging provider that offers loans for chain breaking must be FCA-accredited. This means that they must comply with the various rules and regulations that ensure consumers are treated fairly. In addition, many bridging lenders belong to industry bodies such as the Association of Bridging Professionals or the Associations of Short Term Lenders; these groups hold their members to a high standard of conduct, and give consumers some recourse if they feel they have been unfairly treated.
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