I am currently in the process of moving home and although this particular move doesn’t require the use of mortgage funding (I already own the property we are moving in to), it did get me thinking about those who need to finance the purchase of their new home, without first having sold their existing property.
This is a common scenario where clients are perhaps nearing or in to retirement age and find themselves equity rich, but cash poor. They are often on pensionable income, but have managed over the years to pay the majority or all of their residential mortgage off. They no longer have the need for a large house and decide to sell-up and move to a smaller property, more suited to their needs. This is a situation we come across every week on the Bridging desk at Brightstar – the classic ‘chain-break’ scenario bridge.
Other examples of this are when there is a property chain and a buyer pulls-out of the sale, meaning the chain is incomplete and they are unable to complete the purchase of the new property, without first finding a way of releasing equity in their home, which was previously coming from their sale.
Some may argue that if you haven’t yet sold, then why consider buying? But we are obsessed with property and property ownership in the UK. When we see our ‘dream’ home, we have to have it and sometimes even if this means bridging the gap between purchase of the new home and sale of the existing. Although this concept is almost as old as bridging itself, it is still one that can confuse the uninitiated or inexperienced broker or client, so let me explain, what is really a very straight forward process.
Mr & Mrs ‘X’ own a 5 bedroom, detached property and are aged 67 and 69. Their children are all grown-up and have children of their own. Their property is worth £500,000 and they have no mortgage on it, having paid it off 7 years earlier. They have decided to down-size from their 5 bedroom house to a smaller and better-suited, 2 bedroom bungalow in a nearby village, a few miles away. They have found the perfect property for them, which is exactly where they want to spend their retirement years. The purchase price of the new property is £250,000. The selling agent has advised them that the property has just gone on the market for sale and has already generated a lot of interested parties and the vendors are looking for a quick sale to preferably a cash-buyer. Mr and Mrs X have had two valuations on their home and are looking to place on the market for sale within the next few days. They know that if they had sold their property, they could buy the new property outright, but as they don’t yet have a purchaser, decide to seek advice from an FCA-regulated broker, who holds the necessary permissions to advice on whether or not bridging finance may be suitable.
Recognising that bridging might be suitable in these circumstances, the broker contacts us to see if we can assist with this regulated bridging case. With sufficient equity in the existing home to raise 100 per cent of the purchase price of the new property (£250,000) and cover the associated legal fees, stamp duty and some additional funds to carry out some minor home improvements to the new property, bridging terms were quickly issued at a monthly rate of 0.75 per cent per month, with a 2 per cent facility fee and no exit fees. When exit is sale, it is good practice to offer for a longer term than required, so usually 12 months, to allow maximum time to obtain a sale at open-market value and not force a sale at a lower offer. This bridging solution enabled Mr and Mrs X to purchase their new property within 28 days and gave them ample time to achieve a sale on their own property at full asking price, which completed 4 months later and enabled them to clear off the bridging finance, including the rolled-up interest that had accrued. There were no exit penalties.
Whilst not required, the second property (the one being purchased) can also be offered as security, to reduce the LTV down and also to provide some additional comfort and security to the lender. They often like to ‘follow the money’ so may also take a 1st legal charge over the new property as well, although in this instance are unlikely to insist on a valuation on the property.
Next time, I will cover another case study to demonstrate when bridging finance can offer a suitable funding solution.