Property Downsizing

Everything you need to know about bridging finance when considering Property Downsizing

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Real estate ownership is a great way to save for the future, and many individuals build up as much equity as possible in their property throughout the course of their lives. However, a home that is suitable for a growing family can prove to be a financial burden later in life, and in many cases an aging couple may decide that they’d prefer to live in a smaller, more manageable home. Not only does this keep costs down but it can also provide a valuable pot of retirement savings, as the equity in their old property is released as liquid assets.

Downsizing is a valuable and popular choice for many individuals throughout the UK, and downsizing finance is an important tool for ensuring that the process is smooth and straightforward. In many cases, bridging loans are a vital link in making certain that the process of releasing equity from a family home is completed as efficiently as possible, and that no time or money is wasted in the transition from one property to another. In this article we’ll discuss the requirements and pressures that come to bear on those looking to downsize their property and look at the ways in which downsizing bridging loans can be used to meet these needs.

While bridging finance is a powerful and flexible tool for enabling homeowners to downsize, it also comes with several key responsibilities; chief amongst these is the charge which bridging lenders will take out on the borrower’s assets. This enables bridging lenders to provide large secured loans, but also means that if the loan is not repaid in full (and with interest), the lender can potentially repossess the borrower’s property. With this in mind, downsizers should make sure to consult an experienced financial advisor before proceeding to ensure that bridging finance is the right answer in their situation.

Meeting the Needs of Downsizing

Before talking about downsizing loans, it’s important to understand what the pressures of downsizing really are. Without an appreciation for what makes downsizing difficult, it’s hard to understand how bridging finance can be the ideal answer in many situations. Firstly, the most important pressure on anyone looking to downsize their home is to release as much equity as possible. Over the course of a lifetime, most homeowners will build up a sizeable chunk of equity in their property, or even finish paying off their mortgage; when moving to a smaller, cheaper property, this equity can be converted into cash to sustain retirement. However, there are certain factors which can make downsizing efficiently difficult, and can reduce the amount of capital available after a sale.

A common issue for downsizers is one that will be familiar to many homeowners; the property chain. When looking to move into a new home, it’s almost always necessary to complete the sale of the existing home before making a new purchase. This means that downsizing can only happen once a buyer for the couple’s property has already been found, which may take several months. In the meantime, the ideal downsizing property might have slipped away, and the downsizers could be put right back to square one. Some sellers try to speed this process up by accepting the first offers that come along, but this often means accepting a low asking price to achieve a quick sale.

What’s needed is a way to bridge the gap between one home and another - buying the new property without having to sell the old one. Fast, short-term secured loans are the ideal solution, taking the name of “bridging finance” because they’re ideally suited to cover the purchase of a second property whilst the current one is sold. A typical downsizing bridging loan enables the homeowners to quickly put finances in place to buy their new home without being forced to sell their existing one, which they can then sell at their own pace.

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Bridging Finance for Downsizing

Bridging finance is available in many different flavours, and each of the many bridging lenders will provide their own specific services to borrowers. However, a few of the key aspects of bridging lending that make it ideal for downsizing are listed below, to illustrate the ways in which bridging loans meet the needs of downsizing to a smaller property.

Speed: Bridging finance can be put in place in a matter of days, which makes it extremely easy to purchase a property quickly. This can be vital when securing the perfect retirement home, as a slow-moving mortgage provider can sometimes cause a property purchase to fall through.

Adaptability: Bridging lenders pride themselves on their ability to lend in a huge variety of different circumstances. Unlike mainstream lenders, bridging loan providers can develop bespoke loan packages for each customer, and provide a range of payment structures and loan terms to suit each client.

Security: As mentioned previously, bridging finance is a type of secured loan. Bridging lenders are able to take a wide array of assets as security, and the most common collateral in use for downsizing is real estate; either the owner’s new or existing home may be used, and both first and second-charge options are available.

Flexibility: Many downsizing borrowers will aim to repay their loan through the sale of their existing home. This “exit strategy” is common, and while bridging providers will always stress test the means through which their loan is to be repaid, this popular plan is likely to be approved. However, few borrowers can confidently predict when exactly their house will sell; they require an open-ended loan which may be repaid at any time. Unlike mortgage lenders, few bridging providers charge early repayment fees, which enables borrowers to take out bridging finance without being penalised if they repay early.

Stability: The provision of regulated bridging finance throughout the UK is vital for the continued prosperity of the real estate sector. Thanks to the many options available to downsizers, and the many ways in which bridging finance matches the needs of downsizing, bridging loans are an ideal solution for many UK homeowners looking for somewhere smaller and more manageable.

Frequently Asked Questions

What is a bridging loan?

A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.

What can I use a bridging loan for?

Bridging loans can be used for a wide variety of purposes. Perhaps the most common purpose is to allow you to buy a new home or business premises before you have sold your existing property. They can also be used by investors to buy property at auction, landlords to acquire buy-to-lets, developers to acquire and renovate properties and businesses to raise working capital. There are a myriad of different uses and can help to find the best loan for you.

What rates can I expect to pay on a bridging loan?

In general most bridging loans will fall between 0.5% and 1.5% per month although occasionally they can be either slightly cheaper or slightly more expensive. Each loan is priced on risk with particular attention paid to the property, its location and the strength of your exit strategy.

How long will it take to get these funds?

Many lenders can agree terms in hours and funds can be in place in days rather than weeks. Average completion times with some lenders can be in the range of just 7-14 days. When you require speed to take advantage of a time-limited opportunity can help you to find the best lender for your unique circumstances.

How much can I borrow?

Loans generally range from £10,000 to £50M with smaller or larger amounts provided on an exceptional basis. The value and equity within the property or properties you are securing against will determine how much you can borrow. The maximum loan to value (LTV) currently offered by most lenders ranges between 65-80%

Talk to our bridging finance experts.
Call us on 0207 043 5271

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