So you are ready to exchange, coming up to retirement and moving downmarket to a fabulous property that you have found in the South West. Life feels good and you’re looking forward to the quiet life. Then you receive the bombshell phone call; your purchaser has dropped out. You know that this is probably the end for your purchase…………or is it?
Well not necessarily.
The example above happens more often than you think and there is a way out for many, especially for those moving down market.
The solution? A Bridging Loan
This is a classic use for a bridging loan as it provides the purchaser some money to complete on their purchase, whilst funds from their sale are awaited. Here is a basic idea of how the numbers work:
Your current property, value £850K, with no mortgage
Your new property, purchase price of £450K
In a case like this the lender would put a first charge bridging loan on your current property, lending you the required funds to purchase plus a “comfort” charge on the purchase to tie the use of the funds. If the current property has a mortgage secured on it, this can also be accommodated subject to limits.
Other situations where a bridging loan could be a lifesaver could be:
- “Gazundering” cases. These are offers which are designed to leverage price reductions from sellers. Effectively the offer is placed knowing that vendors will often complete their purchase as part of a chain, then just before exchange of contracts the “gazundering” offeror threatens to withdraw if the vendor does not drop the asking price dramatically
- Survey problems. Situations where an issue with a survey threatens a chain breakdown
What are the risks?
Getting stuck on the bridge!!!
The key to effective use of a bridging loan is to be in it for as short a time as possible. Bridging finance is just that, a short term solution. If you get stuck on a short term solution, in the long term……………it will cost!
So, if your sale falls through due to a survey problem that comes up on your property and you are told that it can be fixed in a couple of months, how sure are you that this is the case?
If your buyer pulls out, how sure are you that your property will resell? How long will it take?
Time is money on bridging finance, so be realistic and not blinded by the forward purchase.
Top Tip: Don’t back yourself into a corner when taking out a bridging loan, if you think that it will take 3 months to sell your property, take a 6-7 months bridge.
It will cost you no more money if set up correctly should you settle the loan after 3 months. The extra months are just insurance and mean that if you do overrun it will be at the standard contract rate, rather than a penalty interest rate………..which can be double.