Frenzied competition on the UK housing market is prompting more potential buyers than ever before to consider the alternatives to conventional mortgages and home loans. In particular, bridging loans have become popular among those looking to opt out of traditional property chains and beat competing bidders to the punch.
Speaking on behalf of Crystal Specialist Finance, group director of sales and marketing, Jason Berry, said that the growing disparity between supply and demand had given birth to a “new type of bridging borrower”.
“As every new home listing is seeing circa six purchasers battling to win ownership this is creating an increasing amount of purchasers are taking out bridging loans on their existing property so they can position themselves as cash buyers or be perceived as cash buyers,” he said.
Bridging Loans for Property Purchase
Specialist brokers and lenders across the UK have seen a notable uptick in bridging loan application volumes from homeowners in the process of relocating. The more ferocious the competition on the housing market, the greater the risk of a chain break at some point during the buying or selling process.
For most, buying a new home is only possible when the sale of their current property has been agreed, and they have received full payment. But as would-be buyers can withdraw their offers at any time (and buyers can be gazumped by competing bidders), the risk of chain breaks cannot be ruled out.
With bridging finance, movers can access the capital they need to purchase their next home as a cash buyer, removing their reliance on other buyers and sellers within the property chain.
In a typical example, a homeowner with a property valued at £400,000 is looking to purchase a new home on sale at £500,000; they take out a bridging loan against their current home with an LTV of 75%, providing them with £300,000 to pay towards their new home. The remaining £200,000 is contributed from their funds, or raised in the form of a separate second-charge loan.
They buy their new home as a cash buyer, their previous home sells several weeks/months later and the funds raised by the sale are used to repay their debts.
“I think this is due to Covid, the stamp duty holiday and so on meaning bridging finance was pushed more into the spotlight and as time goes on it’s becoming more and more mainstream,” commented Sam Clifton, head of bridging at Clifton Private Finance.
“I think this scenario cropping up more frequently is just a result of the general public being more aware of what bridging is and where it can help out.”
Expert Broker Support Essential
Even so, homebuyers considering bridging finance are being advised to seek independent broker support, in order to build a thorough understanding of how the facility works and its potential risks.
“What is crucial for advisers and customers is to make sure they find the right bridging solution,” added Berry.
“You have got some who move into the bridging space and see opportunity to make money with high fees and expensive monthly charges, so you have to make sure it is the right type of solution.”