Potential purchasers and bridging loans

Journalist: Anna Sagar, Mortgage Solutions / Specialist Lending Solutions

ended 20. April 2022

Looking to speak to mortgage brokers about potential purchasers taking out bridging loans on their existing property so they can position themselves as cash buyers or perceived as cash buyers due to limited stock. 

  1. Has this become more common?
  2. Why may that be the case?
  3. Is it a long-term or short term trend?

 

4 responses from the Newspage community

"With such a shortage of stock, the early bird does get the worm, and there are no signs of this changing any time soon. For sellers desperate to move, a bridging loan is one way of decoupling yourself from being in a chain, allowing you to proceed as if you're a first-time buyer, therefore, removing the risk of fall-through for the seller. However, caveat emptor: bridging loans are not as straightforward as you might think, can come with hefty costs and the interest you may end up paying can be eye-wateringly high. You then put yourself in a perilous position. Whoever ends up buying your home could pull out and leave you high and dry. Given that bridging lenders aren't known for their compassion, you could quickly find yourself in a mess and at risk of repossession."
Star Quote
"Residential home movers considering bridging finance on their current home in order to act faster in the property purchase chain might want to think again before embarking on this high risk strategy. Bridging finance is short-term lending usually reserved for the experienced investor or developer as the risks involved make this course of action inconsistent with a capital repayment residential homeowner's appetite for risk. It's fairly high cost borrowing with an average 2% set-up fee and interest around the 0.6% - 1% per month, but crucially severe penalties can be imposed if the debt is not repaid within the timescale agreed at outset. Desperate home hunters with additional cash or alternative exit options might be willing to take the gamble but if the only exit route is to sell the main residence, and that falls through, this can create big and expensive problems."
"While I do currently have a client going down this route, it is not something I would recommend to the average client. You need a lot of equity available for the bridging lender to be comfortable and both interest rates and set-up fees are high compared to a standard mortgage. To my mind at least, unless in extremely specific circumstances, the perceived advantage does not justify the extra cost (and risk) of a bridging loan in this type of scenario. The property market is incredibly competitive currently, but I don't see it as competitive enough where adding this much cost to the transaction is a good move; especially on top of the already considerable costs of moving home anyway."
"Bridging finance for a homemover is always a last resort as house moves can always have a delays or unexpected change of circumstances. For example. the buyer may pull out so you can be quickly caught out and end up without a paddle up a creak with bridging finance secured against your main residence. This is partly the reason for why it’s so uncommon in residential house moves as for the majority of people the only way to exit the bridge is through a sale. "It’s definitely a short-term fix and should only be used in the rarest of cases where clients understand the risks and all parties are fully committed to completing property purchases either end of the transaction without any hiccups."