Potential buyers enlist bridging on existing properties to leapfrog competition – analysis

Jason Berry, group director of sales and marketing director of Crystal Specialist Finance, said that limited housing stock meant a “new type of bridging borrower was emerging”.

“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.”

Berry added that this would give them the ability to move quickly when they did find a property they liked.

He noted that previously bridging had primarily been used for chain breaks and auction finance, so this usage of bridging was quite new.

Cash buyer purchases are less likely to fall through as there is no risk they won’t secure a mortgage, they are not subject to a chain and the process is therefore faster.

An example would be buying a new home worth £500,000, whilst the existing home is worth £400,000.

The buyer takes out a 75 per cent loan on a bridge against the existing home so £300,000 is raised immediately. The remaining £200,000 is used from own funds to make up the shortfall.

The bridging loan is then repaid at the sale of the existing home of by switching to a term loan, such as a buy-to-let loan.

Sam Clifton, head of bridging at Clifton Private Finance, said it had been experiencing a lot more of this kind of borrower behaviour.

He said: “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 its becoming more and more mainstream.

“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.”

Trend set to continue as stock more limited

Brokers said that this trend was likely to continue in the near-term future, and possibly increase, as stock remains strained.

Berry said: “As long as stock stays limited this kind of customer profile wanting bridging finance will increase. It starts with early adopters and then it becomes more mainstream.”

According to the latest Royal Institution of Chartered Surveyors (RICS) residential market survey, new buyer enquiries reached a net balance of nine per cent during March, which is the seventh consecutive positive reading.

It added that new instructions had a net balance of eight per cent, but inventory was “close to historic lows”.

The latest Propertymark data showed that the average number of properties listed by estate agents had risen by 21 per cent in February to 23 available properties per estate agency member.

The report said that this was the highest for sale tally for around five months, but new buyer demand and the number of registered buyers remained strong.

Propertymark said that there were around 26 potential buyers per property.

Bridging as property finance ‘high-risk strategy’

Rob Peters, principal at Simple Fast Mortgage, said that homemovers considering using bridging finance to act faster in the property chain “might want to think again before embarking on this high-risk strategy”.

He explained: “Bridging finance is short-term lending usually reserved for the experienced investor or developer as the risks involved make this course of action inconsistent with a capital repayment residential homeowner’s appetite for risk.

“It’s fairly high-cost borrowing with an average two per cent set up fee and interest around the 0.6 to one per cent per month, but crucially severe penalties can be imposed if the debt is not repaid within the timescale agreed at outset.”

Peters said that “desperate homehunters” with additional cash or alternative exit options may be willing to take the gamble but if the only exit was to sell the main residence and that falls through it could “create big and expensive problems”.

Berry said: “What is crucial for advisers and customers is to make sure they find the right bridging solution. 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.”