There’s a lot of pressure on home buyers in these times of low supply and high demand. But if your chain breaks you may not have miss out on your dream property - Steve Nobb explains how a bridging loan could come to the rescue
Things aren’t easy for people looking to purchase a new home. It’s no secret that we have a housing shortage in the UK – there simply aren’t enough homes to meet the demand from buyers.
A good example of this comes from the recent house market report from Propertymark, a trade body for estate agents. It found, in June, the typical estate agency branch had 26 properties available for purchase.
Yet an average of almost 80 new buyers registered.
One of the impacts of this imbalance is it does not take long for quality properties to be snapped up.
This might sound like good news for the seller, but for the buyer this can place them under a great deal of pressure.
Indeed, after agreeing a price, progress can slow substantially.
Issues with the legal side of property deals have led to deals being significantly delayed recently, and those delays can put the transaction itself at risk as there could be situations where the seller cannot wait for unexpected delays.
Likewise, if the sale of your property collapses and needs to be remarketed, this will cause delays – and the seller of the property you are purchasing may not be prepared to wait.
If, as a buyer, yourself in this situation it can be very difficult. Particularly if this is your perfect property – one that meets all your needs and is located ideally for work, school or leisure.
How a bridging loan can help speed up a transaction
Thankfully there is a way around this, in the form of a bridging loan. Bridging loans are short-term finance, designed to help you complete a transaction quickly before refinancing onto a regular mortgage later on.
In other words, they ‘bridge the gap’ between buying a new home whilst waiting for the sale of another property or while another type of finance (such as a mortgage) is being arranged.
When are bridging loans most commonly used?
Bridging loans are commonly used by those who purchase a property at auction. This is because, should you land a successful bid, then you will only have a month in order to pay the transaction price.
That’s too short a timescale for lenders to turn around a mainstream mortgage, but as bridging loans can be arranged within a matter of days they could be the perfect option, with the buyer then refinancing onto a more traditional mortgage later on.
However, bridging loans are also well placed to assist residential buyers who need to break a property chain, to help them secure a purchase before the sale of their own home has completed.
Buyers can take out the bridging loan and use the funds to go through with the purchase of their desired property, and then use the money raised from the sale of their home to pay off that bridging loan.
Bridging loans: what to watch out for
The obvious downside to using a bridging loan is that this is an additional cost for buyers to factor in.
There is no shortage of supplementary costs that come with buying property and utilising a bridging loan in order to break a housing chain will make the prospective move more expensive.
Therefore, whilst bridging loans offer fast, flexible finance, there will be higher interest and fees involved, which means they are generally only considered as a last resort.
What bridging loan is right for you?
Bridging loans are not the sort of product you tend to find on offer from high street lenders, which is why it’s a good idea to work with specialists.
Making use of experts in this sector can help you pick up that dream property, even if unexpected delays could put the purchase of that dream property at risk.
Remember, any property used as security, which may include your home, may be repossessed if you do not keep up repayments on your mortgage.
Steve Nobbs is bridging and commercial manage at The Loans Engine
