Imagine finding your perfect home, only to have your sale fall through at the last minute.
Property chains are a common obstacle in the UK housing market, often leading to stress, delays, and even collapsed deals.
However, there’s a proven solution used by astute homebuyers and investors: bridging finance.
This guide will walk you through the process of using bridging loans to break property chains, helping you achieve your property ambitions.
The Complexity of Property Chains
In the UK property market, chains form when multiple buyers and sellers are interconnected, each relying on the others to complete their transactions.
For instance, you might be selling your current home to purchase a new one, while your buyer is also selling their property to another party. This interconnected series of transactions creates a chain.
While chains are common, they’re also notably fragile.
A single issue – such as a buyer’s mortgage application being rejected or an unfavourable survey result – can cause the entire chain to collapse.
Recent data shows that the average property chain in the UK involves four transactions, with approximately 30% breaking down before completion.
The impact of a broken chain can be substantial. You could lose out on your dream home, face unexpected costs, or find yourself unable to move from a property you’ve outgrown. It’s no surprise that many homeowners and investors are seeking ways to avoid these pitfalls.
Bridging Finance: A Solution to Chain Breaks
Bridging finance offers a short-term funding solution that can help you overcome the challenges of property chains.
Consider it as a financial stepping stone, connecting two transactions.
Unlike conventional mortgages, bridging loans are designed for speed and flexibility. They typically last from a few months to a year and are secured against property.
While they carry higher interest rates than standard mortgages, their short-term nature and quick availability make them an appealing option for breaking chains.
In the UK market, bridging loans usually offer loan-to-value ratios of up to 75%, with interest rates ranging from 0.5% to 1.5% per month. It’s worth noting that these figures will vary based on individual circumstances and market conditions.
The lenders that we work with are happy to consider loans up to 90%, where the circumstances are suitable for them. To borrow more than that would need another property and a cross charge bridging loan.
A Step-by-Step Approach to Using Bridging Finance
Evaluate Your Position
Before opting for bridging finance, it’s essential to assess whether it’s the right solution for you.
Consider your financial situation, the current property market conditions, and your long-term objectives. While bridging loans can be incredibly useful, they’re not suitable for everyone.
Seeking advice from an experienced finance specialist who can provide tailored guidance based on your circumstances is highly recommended.
Select the Appropriate Bridging Loan
Bridging loans come in two main varieties: open and closed.
Closed loans have a fixed repayment date, usually linked to a specific event like the sale of your property. Open loans offer more flexibility but come with higher interest rates.
When choosing a loan, consider factors such as interest rates, fees, and loan terms. In the UK, it’s also important to understand the distinction between regulated and unregulated bridging loans. Regulated loans, used for owner-occupied properties, offer additional consumer protections.
Prepare Your Application
To apply for a bridging loan, you’ll need to gather several documents, including proof of income, details of the property you’re buying and selling, and a clear exit strategy.
Your exit strategy is particularly important – it’s your plan for repaying the loan, typically through the sale of your existing property or refinancing to a traditional mortgage.
Read more: How Do You Pay Back a Bridging Loan?
Obtain Your Bridging Loan
Once you’ve chosen a lender and prepared your application, it’s time to secure your loan. Working with a specialist broker will help streamline this process.
They can guide you through the application, communicate with lenders, and often secure more favourable rates.
UK bridging loans are known for their swift processing times. While traditional mortgages can take weeks or months, bridging loans can often be approved and funded within 7-14 days.
Finalise Your Property Transaction
With your bridging loan in place, you can proceed with your property purchase, effectively breaking the chain.
Work closely with your solicitor to ensure all legal aspects are handled correctly. Creating a timeline of key milestones, from exchanging contracts to completion day, can be very helpful.
Repay the Bridging Loan
The final step is repaying your bridging loan.
This usually occurs when you sell your existing property. It’s important to adhere to your agreed repayment timeline to avoid additional costs.
Advantages and Considerations of Using Bridging Finance
Bridging finance offers several benefits when it comes to breaking property chains.
It provides speed and flexibility, allowing you to capitalise on opportunities in the property market. It also gives you a competitive edge, as chain-free buyers are often more attractive to sellers.
However, it’s important to be aware of the potential risks. Bridging loans come with higher interest rates than traditional mortgages, which can accumulate quickly if not managed properly. The short repayment terms also mean you need to have a solid exit strategy in place.
The Financial Conduct Authority (FCA) regulates bridging loans for owner-occupied properties, providing additional consumer protections. However, many bridging loans, particularly those for investment properties, fall outside this regulation.
Let’s talk bridging loans!
Recommendations for Successful Use of Bridging Finance
To maximise the benefits of bridging finance, consider the following advice:
- Collaborate with experienced professionals, including a specialist bridging finance broker and a solicitor familiar with these transactions.
- Develop a robust exit strategy and a backup plan.
- Understand all the costs involved, including interest, fees, and potential early repayment charges.
- Maintain open communication with all parties involved in your property transaction.
- Be prepared for possible delays and have contingency plans in place.
Remember, property markets can vary significantly across the UK. What works in London might not be suitable in Manchester or Edinburgh. Always consider local market conditions when planning your strategy.
Bridging finance is an effective solution for breaking property chains, allowing you to progress with your property goals without being hindered by the complexities of linked transactions.
However, it’s not a decision to be taken lightly.
By understanding how bridging loans work, carefully assessing your situation, and working with experienced professionals, you can use this financial solution to your advantage.
If you’re considering using bridging finance to break a property chain, the next step is to speak with a specialist finance broker. They can provide personalised advice based on your unique circumstances and help you work through the various options.
Need some help?
If you need a short-term bridging loan then a specialist broker like us is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To speak with a specialist broker, please call us on 07545 277 457
