‘The chain is how long?!’ he exclaimed…
Whether it’s buying or selling a property, being stuck ‘in a chain’ – that is a number of house sales that are all linked together – can be stressful & expensive; it can even prevent you from moving!
When the sale becomes ‘shaky’ one person drops out, then the whole chain can collapse – you & everyone else in it can be back to square one. I have been involved, just recently, with a client’s move & they have made the decision to break (…away from) the chain…partly in response to the market conditions & concentrate their efforts upon selling first!
Stop press – just been reading here about ‘…Nested, the chain-breaking estate agency that helps home movers buy their next house before they sold their current home, has raised £36m in a new funding round to expand its business’.
How do I break the housing chain?
Let’s look at some of the advantages of breaking the housing chain – fortunately, there are things you can do to break housing chains but they should not be taken likely as they will come at a price.
Positive reasons for breaking the housing chain might be:
- it makes house buying far more predictable & you are less likely to affected by events beyond your control. A lot of people moving home will have experienced how frustrating it is (& costly) to lose the house you want, because someone you have never met can’t arrange a mortgage, a survey or a removal company in time
- it puts you in a very strong position when buying & you are for more likely to achieve an advantageous deal that suits you & your circumstances
In my experience, over the years, many sellers (& their estate agents!) would prefer to take a buyer who has the cash in the bank than have the risk of a sale that is dependent upon finding a third party to buy the property. There is also the added attraction (well peace of mind certainly) that you are less likely to be gazumped – by this I mean that if you put in a fair offer, the seller is unlikely to take another if it means entering in to a property chain.
- selling (that is completing on your sale) before you buy
- taking out a bridging loan
- not selling, but increasing the mortgage on an existing property to use as deposit
Selling before you find a house to buy
If anyone has actually personally been involved in a chain – perhaps been gazumped or felt that they’ve undersold – they will recognize that stressful feeling! There can be an appeal to minimize the stress, just sell regardless & move straight into rented or temporary accommodation. This way you remain in control of the sale of your own house – you avoid being dictated to; having to make a quick deal & selling perhaps below market value.
When you are in the strongest negotiating position – sold & renting – you can not only possibly dictate the time frame but also, as you are in the strongest negotiating position, get a better price when you buy another property if you find a seller who is also keen to move quickly.
The other positive is that it is much easier to stay within budget – you will know exactly how much you can spend because you’ll have the money from your sale already in the bank – buying your next home won’t be dependent on you achieving the expected price on your existing one.
Currently – in a buyers market – if prices are continuing to remain static or even falling, then houses become more affordable the longer you wait.
If you sell first, expecting to be able to buy quickly afterwards, you may be disappointed & instead have to rent for a time, which can prove very costly – important to keep abreast with market conditions, monitor all the market reports.
If prices are rising fast, by the time you’ve sold your house & sorted out somewhere to rent, a new house will be much less affordable.
In the past one would have uttered this subject in hushed tones…there’s no doubting that applying for a bridging loan is risky, not cheap & only applicable in very specific situations…
Currently the housing market is steady – more of a buyer’s market – but this could quickly change. Funding criteria is still challenging for many buyers, delaying sales. Particularly since the recent recession lending rules & criteria have tightened – for those self employed, the over-55s & with ‘buy-to-let’ lending. However, there are a number of short term or bridging lenders, all with the aim of ‘chain break’ lending – just be wary, the rates might be competitive but the fees vary wildly & ofcourse always seek out the professionals for any independent financial advice!
However there are some important scenarios to consider:-
- if you have found that dream home that you really don’t want to miss & you need to put down a deposit for the mortgage then it might just be worth temporarily applying for a short-term loan secured against your property & paying it off once you sell it – which breaks you out of the chain!
- a positive factor is that to the seller/seller’s agent (as these types of loans are expensive) this will clearly demonstrate your seriousness & commitment to purchase.
- if you are seriously considering this way forward, the general advice is only to commit for a bridging loan once you have exchanged contracts.
- if you take out a bridging loan before exchanging, are then gazumped, you will have wasted a lot of money & if you are unable to sell your house very soon after, you may struggle to pay back the loan as the interest payments escalate.
- it would be advisable to have your property not just on the market but also achieving some interest, before taking out a bridging loan
- if you found the interest shown in your property is not good you may be under pressure to accept a lower price for the property you’re selling to pay off the loan as soon as possible
- if property prices are falling, you may be left without the means to pay off the loan; the advice is only apply for a bridging loan if you hold most of the equity in your current property.
Extending the mortgage on your existing home
An alternative way to break a chain is by extending the mortgage on your existing home & using that money as a deposit for the mortgage on the new property, giving you potentially the option to have a larger mortgage than you would otherwise need.
You can then rent out your old home using the rental income to pay the mortgage on that property; depending on the property’s ‘potential’ this can be a good investment. This transaction is known in the trade as “let to buy” – you are letting out your old property to pay for a mortgage that helps you buy a new one. At a later stage, in favourable market conditions. you then have the option to sell on your old home at a time to suit you.
With any of these options we must add that it is always best to seek qualified advice particularly from a respected independent financial advisor & if requested we would be happy to give you some suggestions.
To lighten the mood somewhat…I spotted these (tongue firmly in cheek) guidelines for applying for a loan (K Ray).
‘Be honest on your application form. If you say you are a High Court Judge but have a Mohican haircut, live in a rented bed-sit & confess to being on probation, then there is a chance your pretence might be rumbled…’
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