Opportunities of Bridging Loans and How They Can Support Chain-Free Home Purchases

The UK’s housing market continues to go from strength to strength, proving a blessing for some and a curse for others. Disparities between supply and demand are growing, with the average estate agents’ branch now having just 22 properties available for purchase. 

By contrast, estate agents currently have an average of 84 registered buyers, prompting ferocious competition among interested bidders.

Meanwhile, the number of cash buyers purchasing homes outright has increased significantly.  According to the latest data published by Hamptons, a full 73% of home purchases in 2022 so far took place ‘chain free’. Back in 2010, the figure stood at just 65% when becoming part of a property chain was not seen as such a risk.

Commenting on the findings, Hamptons said that the more competitive things become on the housing market, the greater the appeal of becoming a cash buyer.  Traditionally, the ability to purchase a home outright has been reserved for those with significant on-hand cash reserves.

The appeal of chain-breaking

The biggest benefit of avoiding conventional property chains is removing reliance on other buyers and sellers. If you have the cash available to purchase your next home outright, it doesn’t matter whether you have found the right buyer for your home.

You can purchase your next home for cash, leave your previous home on the market and wait for it to sell for its full market value. The opposite is to move only after agreeing on a sale on your current home, which means becoming part of a long and potentially fragile property chain.

In addition, estate agents report that properties purchased chain-free are almost always offered at preferential rates. On average, it can cost around 2.5% less to purchase a property as a cash buyer, than via conventional channels.

It is therefore understandable why more prospective movers than ever before are looking into the available options for going chain-free. One of which is bridging finance, opening the possibility of cash property purchases up to a much broader audience.

Bridging finance for chain-free home purchases

A competitive bridging loan can empower movers with the flexibility traditionally enjoyed only by comparatively wealthy cash buyers. The simple fact of the matter is that most homebuyers simply do not have massive sums of cash in reserve, sufficient to purchase their next property outright.

Bridging finance is issued in the form of a secured loan, similar to a mortgage. The applicant’s home is used as security for the loan and the amount they can borrow is based on their equity level.

For example, a homeowner with a property valued at £400,000 could take out a £300,000 bridging loan with an LTV of 80%. If the same homeowner had only paid off 50% of their mortgage, they would have £200,000 equity and could therefore borrow £150,000 at 80% LTV.

Importantly, the funds raised with a bridging loan can be accessed much faster than those associated with a conventional mortgage or home loan. With all the required paperwork and evidence in place, the facility can be arranged and accessed in just a few working days.

This gives prospective buyers with sufficient equity in their current home the opportunity to buy their next home outright, beating competing bidders to the punch.

Cost-effective property purchase loans

As mentioned above, vendors are often willing to accept lower prices for their properties from chain-free bidders, typically around 2.5%. In addition, relocating with bridging finance negates the need to rush through the sale of your own home and perhaps agree to a price you are not fully happy with.

After buying a new home with a bridging loan, the buyer’s previous home can be left on the market for as long as it takes to sell it for the best possible price.  In the meantime, interest accrues at a rate as low as 0.5%, adding up to a hugely cost-effective facility.

Best of all, the flexibility of bridging finance opens competitive short-term funding up to the broadest possible audience. Even with a poor credit rating or a history of bankruptcy, it is still possible to qualify for a competitive deal.

For more information on the benefits of buying a home chain-free or to discuss any aspect of bridging finance in more detail, contact a member of the team at UK Property Finance today.