How a bridging loan can save your home
The agony of being on the brink of completing a home purchase, only to find that the chain has broken, is distressingly common. Latest figures show that up to 39 per cent of UK property sales fall through, as a result of buyers making a lower offer or pulling out of a purchase altogether, or from a chain breaking down.
In the hectic post-Covid market, with hundreds of thousands of buyers rushing back into the market, a new dynamic appeared: sales falling through when buyers over-promised and found themselves unable to meet an inflated price. “Many properties are going under offer within hours of going on the market, and buyers are often offering above asking price to try to beat the competition,” said Danny Luke of Quick Move Now. “The problem is that the pressure can lead to impulse offers, that buyers later withdraw.”
Withdrawn offers mean broken purchase chains, with the lives of many others potentially disrupted, together with additional financing and administrative costs. It can prove disastrous for some buyers, if they are operating on slim margins, with survey costs and arrangement fees running into thousands of pounds.
Deals fall through more often in a volatile market: when prices are rising sharply, sellers may feel they can achieve a higher valuation by inviting new offers, while buyers are more willing to out-bid one another or to ‘gazump’ an existing offer. By contrast, in a falling market, buyers may submit lower offers, hoping that sellers are sufficiently desperate to accept, while sellers may take their properties off the market and wait for better conditions to return. Sometimes an unsatisfactory survey can delay or halt the process.
Volatility extends to financing options: The Times newspaper reported that in 2021 banks have been overwhelmed by mortgage applications, leading to lengthy delays in approvals and to purchases falling through when finance has been refused, after borrowers believed they would receive it.
Climate of uncertainty
Adding to the climate of uncertainty, Covid has pushed and pulled home buyers in conflicting directions. Some have leapt at the opportunity to move out of crowded cities and into the countryside, lured by the option of working from home and gaining more space. Yet as companies return to their offices and the potential disadvantages of countryside living become clear (poor mobile and internet connections, lack of entertainment, difficult transport connections), the flow has started to reverse. Cue further chaos in the property sales market, with buyers and sellers changing their minds as conditions evolve.
Conducting business remotely has caused multiple delays to the property market, compounding other troubles: it’s impossible to do a proper home valuation survey remotely, for example. Restrictions on travel have made it hard for some buyers even to view properties they’re interested in buying. Job losses and people falling ill with Covid itself have been a factor in some deals falling through.
These are historic conditions, according to property professionals. Popular website Rightmove announced that the first six months of 2021 had been its busiest in 20 years, with property values jumping by £21,389 (6.7 per cent) between January and June to reach an average of £338,447. The expiration of the stamp duty holiday at the end of June did little to damped demand, said Rightmove: “High activity levels are continuing,” it confirmed.
In mid-November 2021, the first signs of rising inflation began to appear, with experts forecasting levels of 5 per cent or more in 2022. This itself could add further pressure to the housing market, as prices are likely to rise more quickly, whereas lending will become more expensive. Some buyers will be priced out of the market – causing sales to fall through – while sellers’ eyes will light up at the prospect of higher valuations.
With upwards of 700,000 sales progressing in late 2021 and into 2022, the potential for broken chains, for all of the reasons listed above, remains extremely high. The simple fact of high activity levels is itself a cause of sales falling through: the more buyers there are, the longer chains are likely to become (and the more likely they are to fail).
An affordable solution
For an increasing number of buyers, bridge loans offers an affordable solution to these problems. In the final months of 2020 and into 2021, applications for bridging loans jumped by more than 39 per cent compared with pre-Covid levels, according to the Association of Short-Term Lenders (ASTL).
Whereas mainstream mortgage lenders can typically take three months to arrange a deal, buyers may not be able to wait this long if they want to secure a sought-after property. Bridging loans, by contrast, can be arranged far more quickly, allowing a purchase to complete, while giving the buyer time to finalise the sale of their existing property or to arrange long-term financing.
According to Stephen Clark at bridging loan broker Finbri: “In many property sales, speed is of the essence. If a buyer isn’t able to move quickly, sellers lose patience and look elsewhere, especially in a heated market such as this. The risk of a sale falling through, with all the consequent heartache and expense, means that bridging loans are an increasingly attractive option for many.”
The advantages of a bridging loan extend beyond securing, or salvaging, a property deal. The buyer may avoid or reduce the cost of renting a property while they wait for a transaction to complete. They can save themselves the expense of extra surveys, financing arrangement costs and legal fees. And perhaps most importantly, they can gain the peace of mind that a property transaction brings, especially in such a chaotic climate.
“Bridging finance helps buyers to complete the purchase of their new home, solving many of their problems at a stroke,” says Clark. “Typically, residential bridging loans are only for a few months, with repayment from the sale of an existing property. They are quick and simple to arrange and take the pain out of this notoriously difficult process.”