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In the UK, buying a house while selling one can be a serious financial challenge, and when a property chain breaks, it can cause turmoil both up and down the chain. But how can you avoid breaking the chain if your buyer backs out?
According to Hamptons, so far in 2022, 73 percent of all buyers have been chain-free, up from 69 percent in 2021 and a low of 65 percent in 2010. This could be due in part to a rise in property chains collapsing in 2021, prompting buyers to seek alternative finance to guarantee they are not impacted if their chain breaks.
It’s no wonder that Scotland has redrawn the battle lines of the property buying and selling process, given the causes of chain breaks, which vary from gazumping to gazundering (when a property buyer lowers their original offer just prior to exchange of contracts). Making an offer in Scotland if you’re part of a chain is impossible because you risk losing your deposit if you don’t follow through.
So, if you’re concerned about your chain breaking due to your buyer gazundering or pulling out altogether, here’s how to buy your new property before selling your old one.
Have you considered alternative finance to pay for your next property?
Bridging finance is a short-term, property-secured loan that usually lasts no more than 12 to 24 months. The lender’s capital is protected because the loan is secured by the property, making the loan’s criteria substantially easier to meet than with a traditional mortgage. While getting a loan against a new property acquisition is normal, getting a loan secured against an existing property is also conceivable, depending on whether the property is already mortgaged and how much remaining equity it has.
As Stephen Clark from Finbri bridging loans, a specialist broker explains, “Bridging loans are 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. So this makes them a viable option for property chain break situations where the borrower needs the finance in place fast but only for a short period and then repays the loan via the sale of a property.”
So, what is property bridging finance precisely, and how does it work?
Bridging finance, often known as a bridging loan, provides borrowers with the funds they need for a variety of purposes, including the purchase of a home. Bridging finance is a short-term loan that enables sellers to complete property transactions. They could be able to position you as a cash buyer, which is one of the best circumstances to be in when looking to buy a new property in a property market that’s buoyant.
A bridging loan is typically a loan that’s in place for no more than 24 months and is secured by a first, second or additional charge on a property. Because the lender deems you to be more risky, the rates you’ll be paying are higher than regular mortgage rates, and they’re also influenced by a range of factors. The lender takes into account the loan-to-value ratio, property type, location, and condition.
It’s important to remember that whilst the rate is higher it is intended to be in place for the shortest amount of time. As such many lenders don’t impose any early repayment charges, so if your property sells sooner than the loan term, you may be able to pay it back more quickly therefore reducing the total interest of the loan. However, these are the fine details you should discuss with your lender as the terms of the loan will vary from lender to lender.
There are usually no monthly payments and only one lump sum payment at the end of the loan period because the loan interest is generally rolled into the loan. This is why a viable repayment plan is essential, and a lender should only approve your loan application if you have one. Avoiding monthly interest payments has two outcomes for the borrower. To begin with, the borrower is free of the responsibility of trying to service the debt during the loan term. Second, because you’re basically paying interest on interest from the previous month, all of that interest is compounded over the term of the loan, resulting in a significantly higher average rate of interest.
Is there a difference in the property purchasing procedure when using bridging loans?
Yes, to put it simply. The main difference is that you’d be treated more like a cash buyer if you had a bridging loan instead of waiting for your property to sell. As such you don’t have to wait for a buyer or an offer on your property to purchase your next property. To put it another way, you’re using bridging loans to fund your purchase rather than a traditional mortgage.
How do I find the right broker or lender for my bridging loan?
There are several methods of quickly finding a broker or lender from search engines, recommendations to specialist bridging loan directories. Let’s take a look at each.
1. Using a search engine to find a bridging loan
The most popular search engines include Google, Bing and Duckduckgo. Each search engine lists search results and aims that those search results are relevant to the query you searched for. Typically the top 3 or 4 spots in a search engine are paid advertisements. This means the company has paid the search engine for the privilege of being there. The following 10 spots underneath the advertisements are typically what’s known as organic which simply means the website has been chosen based on the merits of the website alone. Top tip: If you don’t find the results are relevant to your search you could add more keywords to your search query. For example, if the loan product you need is a bridging loan for a land purchase, instead of just searching for a generic ‘bridging loan’ you could try ‘land bridging loan’. The organic results should then only display the relevant website that matches that term.
2. Going on recommendation
Whether it’s a personal recommendation or looking at a review website, understanding which lenders have met the needs and challenges of borrowers in similar situations can help you choose your provider. Personal recommendations are usually the best as you’re more likely to be able to trust a recommendation from personal contact. Top tip: One word of caution, when using review websites be mindful that these reviews may in fact be disingenuous and not provided by the actual customer but falsely created by the company being reviewed.
3. Using a directory of bridging loan brokers and lenders
There are several UK bridging loan directories that are available and free to access such as bridgingloan.org.uk – the UK’s association of bridging loan brokers and lenders. Their directory page allows you to find local or national companies who arrange or provide this type of finance.
What’s better – getting a bridging loan via a broker or direct to a lender?
Unfortunately the answer to this question isn’t straightforward and really depends on your knowledge of how the sector works as well as your finance requirements.
Here’s the summary of pros and cons for both:
Benefits of using a broker: Typically a broker’s remit is to source the best deal for you based on your particular circumstances. Whilst its not always possible to find multiple lenders who want your loan, they’ll aim to find at least two lenders who will want the deal and in doing so the broker will drive down the rates. Brokers are typically able to find the right deal for the right borrower because they have access to the whole of the market including specialist lenders, family offices and private lenders which borrowers are unlikely to find during their research. Another advantage is that the broker will do a lot of the leg work arranging your financing, from chasing solicitors to helping answer questions about your application. They’re invested in you obtaining a loan because they are paid a fee for arranging your finance.
Disadvantages of using a broker: In using a broker you’ll be charged fees for this service which you have to factor into the overall cost of the loan. If your requirements are niche, complex or specialist then a broker may be the best option for you.
Benefits of going directly to a lender: If you’ve used a bridging loan lender before and were happy with their offering then going direct may make financial sense because you won’t be paying broker fees. Also, where you loan requirements and circumstances are simple then more lenders would likely want to lend to you so by just contacting two or three lenders may mean you find a lender who is able to offer you a deal at an acceptable rate.
Disadvantages of going directly to a lender: You’re unlikely to know of the private lenders or family offices that could be the lender who will offer you the best rate. As you won’t be searching the whole of the market for the best rate you’ll be reliant on the traditional larger lenders. Historically, these lenders aren’t geared towards the end-borrower so their customer service may not be as proactive as you might like. Short time-lines, adverse credit, or complex borrowing structures are generally circumstances that the larger lenders don’t like. This typically means they’re not prioritised over the straightforward loans which can be frustrating for the borrower and potentially cause them to miss their deadlines.
What is the procedure for repaying a bridging loan?
You must repay the bridging loan when the loan period expires. These are sometimes known as repayment plans or the exit strategy. The majority of people who apply for bridging loans want to buy a property, and often the reason is that they want to buy the property before selling their current one, with the intention of repaying the loan using the proceeds from the sale of their current home. There are typically high penalties for defaulting on the repayment at the end of the term and this situation is to be avoided at all costs. When taking out a bridging loan its imperative that you are certain of your exit strategy. If you find yourself likely to go into default its important that you contact your lender as soon as possible as the lender may be able to offer a refinancing solution that avoids the potentially hefty charges that come with a default.
