Selling a property is at once exciting and incredibly stressful. On the one hand, selling a property creates fresh opportunities, either by moving into a new home, or by taking on a development project. On the other hand, selling a property has a lot of vulnerabilities and potential stressors throughout the process. One of the more common vulnerabilities is a chain break.
Chain breaks are one of the most dreaded occurrences for anyone selling a property. The term refers to instances where one transaction in a line of connected transactions fails, causing a knock-on effect that ultimately scuppers any other connected transactions. As chain breaks can happen seemingly out of the blue, they can be quite difficult to react to effectively. However, there is a tool that can help put a chain back together – bridging loans.
In this article, we will provide an overview of bridging finance, how it works to fix chain breaks, and how it can help you. Let’s get started.
What is a chain break?
Chain breaks can occur during any property transaction, though they are most common in transactions connected to a number of others. For example, say you are selling your home to purchase a new one. The buyer of your home is raising the funds to do so through the sale of their home. If, for whatever reason, the buyer of your property fails to close the sale of their home, this would constitute a chain break. You wouldn’t be able to sell your home, and, in turn, would not be able to buy the property you intended. This can be an issue, to say the least, though it is one that can be solved by bridging finance, as we will cover later.
Why do chain breaks happen?
Chain breaks can happen for a wide range of reasons, and you aren’t likely able to do much about any of them. Chain breaks can be caused by a buyer failing to secure the necessary funds or having a change of heart, the seller may end up declining an offer to purchase, or unexpected legal problems may arise. These are only a handful of potential causes; chain breaks can occur due to many more reasons than we have listed.
Preventing chain breaks can never be fully achieved, but you can lower the risk of one occurring in your property chain. Working through professional estate agents with a successful track record is a good idea, as it provides a stronger foundation for negotiations and often results in swifter reactions should chain breaks occur. You could also sell your property before looking to buy, or secure finance to make a purchase, even if your current home doesn’t sell quickly enough. Bridging finance is a good solution if you choose the latter.
What is bridging finance?
Bridging finance is a form of secured finance that helps “bridge the gap” between a purchase and a permanent financial solution. It is a short-term solution in nature, typically lasting for less than a year, though it is possible to obtain a bridging loan with a longer duration. In general, this year-long duration is sufficient to purchase a new home and close the sale of an old home later.
As a secured loan, bridging finance requires physical assets for use as security. This allows bridging loans to be larger in value, but adds a layer of risk not present under unsecured finance. For the purposes of a home purchase, a bridging loan is typically secured against the old home, the funds are used to buy the new home, and the loan is repaid upon the old home’s sale. This grants a degree of flexibility that is difficult to obtain through other methods, and helps mitigate the effects of a chain break.
How can bridging finance help with chain breaks?
Bridging finance is an ideal solution to chain breaks that can occur during a set of connected property transactions. Bridging loans can be used to quickly raise a large amount of money, allowing you to be as flexible as needed when purchasing a new home. With the help of bridging finance, you can make a cash offer on your dream home without first having to wait for your old home to sell. This effectively nullifies the negative consequences of a chain break, although you will need a solid exit strategy.
An exit strategy essentially refers to the method by which you repay your bridging loan. In the case of property purchases, this is often the sale of the collateral asset. This would usually be your old home, though it can be another property in a portfolio, if you were a property developer. In any case, the value of your loan will be similar to the value of the collateral asset. As such, your bridging loan should be repayable upon the sale of the asset, potentially leaving you with a little extra depending on your equity. Note that it is a good idea to make a swift repayment, as bridging loans do have a comparatively high level of interest. However, there is a commonly used alternative – refinancing.
If you would prefer, it is possible to refinance your bridging loan with a mortgage, or another similar form of finance. This can help reduce the immediate financial pressure, though it may be more difficult depending on your equity in both your old and new homes.
How much can I borrow?
One of the main advantages of using bridging finance is the borrowing limit. Essentially, how much you can borrow depends on two factors – the value of your assets and the willingness of your lender. Bridging loans are directly tied to the professionally appraised value of an asset, usually sitting a bit below this value. The exact loan to value is dependent on your particular lender. However, there is usually a limit regardless of your assets; while some lenders will only be willing to lend in the hundreds of thousands, others won’t blink at well over a million. That said, the value of your collateral asset is still the deal breaker.
How to apply for bridging finance
Applying for bridging finance is quite simple. You can do so either at a bank, if your local bank provides bridging finance, or at a bridging loan hub. Both have a similar application process, involving a few details about the target property, the value of your assets, and personal details. Traditional loan information, such as proof of income and credit rating, is not as important during a bridging loan application.
Assuming your details are accurate and appropriate for the house you want to buy, your application will be approved. At this stage, funds will be released to you in as little as 48 hours. This allows you to make a cash offer on your chosen property, and removes the risk of a property chain break, two outstanding advantages when purchasing property.
Wrapping up
Bridging finance is a good tool to use when buying a new home or a development opportunity. Not only does bridging finance nullify the risks of a chain break, but it also provides a series of strong advantages, including speed, flexibility, and an appealing cash offer. However, bridging finance does come with added risk by its nature as a secured loan. For borrowers with insecure finances, this can be a risk not worth taking. As such, it is a good idea to consult a financial professional for advice before taking action.