In the UK, it can be challenging to buy a house while selling one, and when a property chain breaks, it can cause havoc both up and down the chain. But, if your buyer pulls out, how can you avoid breaking the chain?
According to Hamptons, 73% of all buyers have been chain-free so far in 2022, up from 69% in 2021 and a low of 65% in 2010. This could be in part due to an increase in property chains collapsing in 2021, which has led property buyers to seek alternative financing to ensure they are not impacted if their chain breaks.
When you consider the causes for chain breakdowns, which range from gazumping to gazundering (when a property seller accepts an offer from a buyer), it’s no surprise that Scotland has redrawn the battle lines of the property buying and selling process. Making an offer if you’re part of a chain in Scotland is simply unworkable since you risk losing your deposit if you don’t fulfil it.
So, if you’re considering buying your next home before selling your current one, here’s how you can go about doing it.
Use alternative finance to pay for your next home?
Bridging finance is a short-term loan secured on real estate that normally lasts no longer than 24 months. Because the loan is secured by the property, the lender’s capital is protected, making the loan’s criteria significantly easier to meet than with a standard mortgage. While it’s common to secure a loan against a new property purchase, it’s also possible to get a loan against an existing property – it all depends on your circumstances.
So, what exactly is bridging finance and how does it function?
Bridging finance, often known as a bridging loan in the market, provides borrowers with the funds they require for nearly any purpose, including the purchase of a house. Bridging finance is a type of short-term loan that allows sellers to complete property transactions. They may effectively position you as a cash buyer, which is one of the best situations to be in when trying to buy a home.
As Stephen Clark from bridge loan broker Finbri explains, “Bridging finance is a versatile financial tool that can be used to raise funds very fast in order to bridge the gap when an unexpected financial need arises.”
Bridging finance is a short-term loan secured by a first or second charge on a property that normally lasts 12 to 24 months. These short term Bridging loans effectively position you as a cash buyer, which means it is not necessary to sale your old house to buy a new one. The rates you’ll be charged are higher than standard mortgage rates since the lender considers them to be more risky, and they’re also influenced by a variety of factors. The loan-to-value ratio, property type, location, and condition are all factors that the lender considers.
Because the loan interest is frequently wrapped into the loan, there are typically no monthly payments and only one lump sum payment at the conclusion of the loan term. This is why having a feasible plan to repay the loan is critical, and a lender should only approve your loan application if you have one. For the borrower, not having monthly payments has two consequences. To begin with, the borrower is relieved of the burden of trying to service the debt during the loan term. Second, all of that interest is compounded over the life of the loan, resulting in a considerably higher average rate of interest because you’re effectively paying interest on interest from the prior month.
Is there a difference in the home-buying procedure when using bridging loans?
The simple answer is yes. The primary difference is that with bridging finance in place you’d be treated more like a cash buyer instead of waiting for the sale of your property to complete. Bridging financing does not require you to wait for a buyer or an offer to be made on your property. In other words, instead of a standard mortgage, you’re relying on bridging loans to support your purchase.
What is the procedure for repaying a bridging loan?
When the loan term is up, you must repay the bridging loan. These are sometimes known as exit strategies or repayment plans. The majority of people who apply for bridging loans want to buy a property before selling an existing one, and they plan to repay the loan with the proceeds from the sale of their existing property.
What’s better – going via a bridge loan broker or direct to lender?
A few crucial aspects must be examined when considering a new bridging loan, and whether you employ the services of a bridging loan broker shouldr be one of the first questions you ask yourself. We’ll go over the benefits and drawbacks of hiring a bridging loan broker here:
The benefits of working with a bridging loan broker
The major advantage is that a broker can assist you in obtaining the best bridging loan possible. They are well-versed in the market and can direct you to lenders who offer the best rates and terms. Brokers have access to a wide range of funding sources, including speciality lenders, family offices, and private investors, and can assist you in locating the appropriate lender for your needs. They can also assist borrowers in avoiding frequent bridging loan application issues.
Using a bridging loan broker has one clear disadvantage
The biggest disadvantage of utilising a bridging loan broker is that they usually charge a fee. This might cost anything from a few hundred pounds to several thousand pounds, so compare quotations and make sure the costs you’ll be paying are likely to be offset by the money you’ll save before choosing a bridging loan broker.
If you’re thinking about getting a bridging loan, talk to a bridging loan broker first, as their advice and information will come without any commitment to use their services. Most respectable brokers will also provide you with a detailed proposal without requiring you to make any commitment. You can find a free list of reputable UK bridging loan brokers and lenders at bridgingloan.org.uk – the UK’s Association of Bridging Loan Brokers & Lenders.
Should I go to a lender direct?
Whilst you’ll avoid the bridging broking fees you may not be able to achieve the best loan rate as lenders are known for not always thinking outside of the box. Lenders are used to being presented to by brokers who will position the deal in such a light that the lender will be able to quickly and easily see teh value in the deal.
If a borrower approaches a lender who’s not interested then the feedback from the lender is often non-existent. It leaves the borrower in a no-man’s land.
The major advantage though is that there will be no broker fees, however this can often be offset by the borrower not achieving the best rate because they haven’t gone to the whole of the market to create a competitive scenario for their loan.
All these scenarios and criteria should be considered when attempting to purchase a property before selling your current one.