Buy your next home before selling your existing property
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We all know the conventional way of buying your next home is to sell your current one first, or have the transactions complete at the same time but it’s not always that straightforward. In some cases it can be preferable to buy your next home before selling your existing property.
Buying in this way could be an option for you depending on a number of factors like; your motivation for moving, the value of your current property (and the amount of equity you have) as well as the value of the next house you want to buy.
Market Harborough Building Society offers bridging finance, which is a short term lending solution designed to help you complete a property purchase before the sale of your existing home – but does it make sense to buy your next home before you sell your current one?
To find out more about bridging finance or talk us through your plans, call us on 01858 412412.
There are four main reasons why a bridging loan might be the right option for you:
As market conditions change, the supply of houses on the market can rise or fall. In periods of low supply, finding the dream property when you plan to move can be difficult and competition amongst buyers can be higher.
You might be looking for a one-off character property, the right house near a local school or a property that’s just right to downsize into when in or approaching retirement. When you do find that ideal property you need to be ready to act quickly and be in a strong position, with finance already in place so that you don’t lose out.
If your own home is on the market but taking too long to sell, you may also start looking for alternative short term arrangements to fund the purchase of your new home. Even if you are lucky enough to find a buyer soon after putting your property on the market, some factors might delay the completion date of its sale and in turn impact your purchase. With a short term funding solution like bridging finance you don’t have to wait.
It could even be that you haven’t considered putting your current home on the market yet. If you’ve already spotted the perfect home you’d like to buy, short term finance like a bridging loan can effectively turn you into a cash buyer. This would allow you to move quickly in order to beat other prospective buyers in securing the next property as your own, giving you time to put your current home on the market and sell it before paying the loan back with the proceeds.
In some cases there can be a risk of your seller rejecting your offer part-way through the buying process if you can’t complete the purchase quickly enough. They might want a fast completion for a number of reasons and bridging finance can help keep the purchase of your dream home on track.
Whilst we all want our property sales to go through quickly and without issue, that unfortunately isn’t always the reality.
You might be aware of the term ‘gazumping’ where the seller accepts a higher offer than yours, after they’d already agreed to your offer. According to ‘What Mortgage¹‘ gazumping is still prevalent today as much as it was during the 1980s and 1990s.
It can happen right up until the exchange of contracts and there is a legal commitment between you both to buy/sell. Even if the seller accepts your offer, that doesn’t mean they have to take it. That’s why you see ‘sold’ signs outside people’s homes that have ‘subject to contract’ or ‘STC’ written underneath.
If you’ve had an offer accepted on a property that’s received a lot of interest, a bridging loan could help you to move quickly, ahead of other buyers and put you in a chain-free position that’s attractive to sellers.
Sometimes bad moving experiences in the past mean that buyers or sellers are wary of being part of a property chain due to the uncertainty and reliance on others. As you might expect, they don’t want history to repeat itself and want to remove the risk of being in a chain where possible. Buying your new home first can reduce the chain size to help you secure your new home.
It’s not uncommon to purchase ‘fixer-uppers’ or for newly purchased properties to need some refurbishment to improve or modernise them. It’s not much fun living in what could become a building site, so some buyers may want to renovate their new homes before moving in.
In those cases, it can make sense to stay put in your existing property until the new home is habitable. Some properties may need a lot of work that could take weeks, even months to complete. It could be more comfortable to live in your current property whilst renovation work is ongoing on your next home and bridging can help you achieve this.
The ability to buy your new home before selling your existing property can allow you to wait for the right circumstances to sell. It could be that the economic conditions for selling might not be ideal and it could make sense to wait a short while before looking to sell. But that doesn’t have to stop you buying your new home – a bridging loan could be an option.
Some people buy a new home and move into it so they can make some improvements to their old one before selling it. Doing so means they could potentially attract a higher asking price, especially if buyers don’t need to install a new kitchen and bathroom, for example.
What is a bridging loan and how does it work?
A bridging loan gives you access to funds so you can buy your new home before your existing one sells. Bridging finance is designed to help buyers complete property purchases through short-term lending. Effectively they bridge the funding gap between buying your new home and selling your existing property, helping you purchase your new home as a cash buyer.
A bridging loan usually lasts up to 12 months. In some cases, longer-term loans can be arranged, depending on individual circumstances.
The interest on a bridging loan is charged every month but monthly repayments aren’t needed. Instead, the interest can be paid when repaying the loan at the end of the term. Sometimes, you can increase the loan amount to take into account the interest due.
Market Harborough Building Society offers bridging loans for borrowers up to the age of 85, for properties in England and Wales. We lend between £200k and £2m.
Is a bridging loan secured or unsecured?
Bridging loans with Market Harborough Building Society are secured and require a residential property as security – usually a borrower’s existing home. Other properties such as holiday homes or second homes can be considered. Talk to us on 01858 412412 to find out how we can help you.
Does the home buying process differ when using a bridging loan?
With the traditional method of buying a home, the process often starts with you accepting an offer on your current property, arranging a decision in principle from a mortgage lender (which is an indication of what they will let you borrow) and making an offer on the property you want to buy.
The main difference with bridging finance is you don’t have to wait for someone to make an offer and buy your home. And instead of a standard mortgage, you are using the bridging loan to fund the initial purchase of your next home.
When you take out a bridging loan, more emphasis is placed on your ‘exit strategy’ than your income and affordability because the loan isn’t repaid until the end of the term. Bridging is different to standard mortgages where you can repay the loan over a longer period of 25 years or more. As a lender, we must be fully satisfied that there’s a viable plan in place to repay the bridging loan.
How is a bridging loan repaid?
Before taking out a bridging loan, we will expect you to specify how you will pay it back. This is also known as a repayment plan or exit strategy. Most people that take out bridging loans do so because they want to buy a new home before their current property sells.
They use the sale proceeds from the original property to pay off the loan. If you take out a bridging loan with us, we can also consider other repayment methods. Talk to us about your plans on 01858 412412 and we can help you work through your repayment options.
Which exit strategies can be used?
The most common option is to use the sale of your existing property to repay the loan. But, we will consider other exit strategies, such as:
- The sale of other properties, investments, or shares;
- Refinancing through a long-term mortgage;
- Using money from an inheritance.
How much is it possible to borrow with a bridging loan?
The amount you can borrow will depend on your own circumstances:
- Our maximum loan to value (LTV) for bridging loans is 60%;
- Generally, more favourable interest rates are available for lower LTVs
Talk to our bridging team on 01858 412412 to find out how we can help you.
How is a bridging loan’s LTV calculated?
The loan to value is calculated based on the loan as a percentage of the total value of your security. If your property being used as security is worth £400k, and you are borrowing a £200k loan, the LTV is 50%.
Be sure to consider the stamp duty of your next property
It’s important to remember that there might be a stamp duty surcharge on the next property you buy. That’s because it could be classed as a second home. The extra stamp duty can be reclaimed once your first property sells, but you still need to pay the stamp duty up front.
You should consider the cost of legal fees when working out how much to borrow or seek professional advice before proceeding.
What happens if you manage to sell your home while arranging a bridging loan?
If you find that your current house sale completes more quickly than expected and you no longer need a bridging loan to buy your next home, you’ll only be charged for any costs up until the point you withdraw from the loan application process. The fees might include:
- Valuation fee;
- Application fee (£295);
- Any conveyancing solicitor’s fees.
Why choose Market Harborough Building Society?
At Market Harborough Building Society we focus on putting you first by providing a tailored service. We know that everyone is different so with a combination of our great products and friendly team we work hard to provide a customised solution.
From start to finish your case is handled by real people and there are no automated decisions made. There will always be a bridging specialist to call directly.
To find out more about bridging finance or talk to us about your plans call us on 01858 412412.