For anyone who’s involved in buying a house, the property chain is an all too familiar problem. With buyers and sellers all waiting for someone to make the first move there’s a great deal of uncertainty, and it’s possible for an entire chain to collapse; this can easily wipe out months of hard work and thousands of pounds in surveyors fees, mortgage arrangement costs and travel bills. To avoid being caught in this trap, a chain-breaking solution is needed, and by taking advantage of bridging finance it’s possible for homeowners to circumvent the problems of a failing property chain.
A bridging loan is a form of finance that’s secured against property, and as such it’s possible for lenders to repossess and sell the borrower’s property if they fail to repay. Because of this and the costs associated with a bridging loan, it’s important that anyone considering this form of finance as a solution consults a financial advisor before proceeding.
One of the major downsides of being caught in a property chain is the inability to escalate a purchase at your own schedule. With your mortgage tied up in your current home, there’s no way to actually purchase someone else’s; you have to wait until your own buyer purchases your property before you can repay one mortgage and take out another. Of course, your buyer is often waiting on another buyer to complete, so being in a property chain is a waiting game; this is what often makes cash buyers so attractive, as they are able to quickly purchase a property without needing to wait for their own sale to come through.
In order to break the chain, it’s necessary to become a cash buyer again, which can only be achieved by receiving a loan to help “bridge the gap” while your own sale completes. By becoming a cash buyer it’s possible to immediately move forward with the property purchase, and this comes with several key advantages. Firstly, a cash buyer is able to be much more flexible with their schedule than a buyer in a chain, as they’re able to agree on a completion date the meets their own seller’s schedule. Also, the promise of a quick and easy sale is often enough to make a buyer highly attractive; no-one wants to be stuck in a chain if they can help it, and as a more attractive buyer it’s sometimes possible to get a discount on the asking price (this will also guard against “gazumping”, because a cash buyer is a safe bet).
By breaking the property chain, a buyer is able to secure the purchase of a property even if they’ve yet to sell their own. This can be vital if their ideal property has come to market but they aren’t in a position to buy it just yet; they can immediately purchase their new home, and conduct the sale of their existing one independently. Otherwise, they might be forced to sell their current property at a low price simply to afford their new home - the costs of taking out a loan to bridge the gap can be offset by the higher final sale price.
By breaking the chain it’s not only possible to move a property purchase forward ahead of schedule, but also to increase the security and stability of a sale. This benefits both buyer and seller and helps ensure a smooth sales process.
There are three fundamental phases to a chain-breaking loan; the initial application, the payment of funds, and the repayment. We’ll examine each phase and what must be provided at each stage throughout the chain break, to help illustrate how a typical loan would be executed.
Firstly, the initial application is made. This part of the process involves the potential borrower outlining their proposal to the lender. At this stage, they’ll need to provide details of the loan they wish to receive, including the amount of money they need and how long they need it for, the property they intend to purchase with it, the property they intend to secure the loan on and their exit strategy. For instance, let’s say that a typical chain-breaking loan would need to cover a purchase of £300,000. This would be secured on the borrower’s existing home, worth £400,000, and would need to run for up to 6 months while they sell their home. Their exit strategy is the sale of their old home, using the proceeds to repay the bridging loan.
The bridging lender will want to establish that the borrower’s collateral is worth enough to cover the cost of the loan to ensure that their exit strategy is viable and that if the lender should need to recover their costs from selling the property it will be able to do so. Upon providing this information, a decision in principle is usually given within 24 hours. The lender will then conduct an independent valuation of the property and will proceed with the loan.
The second phase, the provision of funds, is quickly reached after a successful application. In many cases, bridging lenders can provide finances in as little as 7 days, so there is little time to wait while funds are put in place. Once the money is made available the borrower can proceed with their purchase - because bridging loans are a short term financial product, interest is usually charged monthly rather than annually. This can add up quickly, so borrowers should act quickly to conduct their purchase.
The final closure of the loan occurs when the borrower sells their old property. This can take several months, and if necessary the borrower often has the option to renew or extend their loan (rather than risk losing their home). At the completion of the loan, the borrower will need to repay the total amount borrowed along with any outstanding interest costs.
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