Chain Break Bridging Loan
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Chain Break Bridging Loan
Rohit Kohli from The Mortgage Stop talks about the industry term ‘chain break finance’ and what it means for property buyers.
What do we mean by the term chain break finance? How does this work?
Chain break finance applies if you’re all lined up to complete the purchase of your home, where there might be three, four, five or more people in the chain – and all of a sudden something goes wrong. It could be that the person buying your home pulls out at the last minute and the chain collapses or breaks.
Bridging finance could potentially help you continue the purchase of your new property. That chain breaks, your buyer pulls out, but you can take bridging finance to continue with your purchase. Then, when you find another buyer for your house you can repay that bridging finance. It’s essentially an emergency backup if something goes wrong with the chain.
How can you minimise the risk of a property chain breaking?
It’s difficult to predict when something’s going to happen. The main thing, which estate agents and mortgage brokers do all the time, is to make sure that the buyers and sellers have the funds in place. They each need a mortgage offer in place and a deposit.
That’s why we do all the checks – we look at the deposit and make sure everything is in place to limit the risk of something going wrong.
Also, make sure you work with solicitors or conveyancers who have good reviews and communicate well. If they’re not communicating with you, you don’t know what’s happening or what the risks are.
Don’t delay on your paperwork and information. Keep things flowing. If your solicitor or mortgage broker asks for information, provide it as quickly as you can, because that keeps the pipeline moving. If someone’s delayed sending information over, it slows things down. The solicitor gets involved in other work while they’re waiting, and that’s how delays start.
The key thing is to stay proactive in the whole process. Talk to your agents and solicitors regularly, identify timelines and blockers and start talking about dates as soon as you can. Communication is the biggest thing – making sure everyone’s aware of what’s happening within that chain.
When and why would you need a bridging loan of this type?
It can happen in a number of different scenarios. Perhaps a seller pulls out, or there’s a delay in their mortgage. You might just need bridging finance for a short time.
It might not necessarily even be chain-related. Maybe you’ve found a property you want to buy, but you haven’t sold yours yet. Bridging finance can allow you to purchase that property and then when your home sells, you pay it back.
What information or documents do I need to gather for a chain break bridging loan?
We’d want the details of the property you’re buying, your current home, valuations, the condition each is in and mortgage information.
We’ll need evidence that the purchase is happening or that the property is up for sale, with a Memorandum of Sale or the listing of the property on Rightmove or similar. That gives us evidence of the exit strategy.
Your exit is selling the property to repay that bridging loan. We also need to understand where you are in that process. Perhaps you actually have sold your home and there’s just a delay in completing the purchase. We might be able to offer a different type of proposition if your property is on the market, but you haven’t had any offers yet.
Then we look at the usual things – your personal information, your income, assets, liabilities and outgoings. We need ID, proof of address, bank statements and solicitor details. If there’s any work that you intended to do on the property you’re buying, we need details of that, too.
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How do I apply for chain break bridging finance? What’s the process?
The best thing to do is speak to someone experienced – a broker who does bridging finance, like us. We’ll have an initial conversation with you, do an initial assessment and check what’s possible.
It’s got to be affordable. You can’t just take bridging finance and not be able to pay it back if something goes wrong. We assess that, look at the loan size and the exit plan.
We get to know you, understand your circumstances in full and collect all the different documents. With that information, we source options from lenders and get you some quotes for what they can offer you.
Then we’ll just kickstart the application process once we’ve narrowed down what works best. That will then trigger valuations and the legal work. There are different steps in the process to make it happen, but it can usually be arranged relatively quickly. We can probably get the finance in place within a matter of weeks rather than months.
How much does chain break bridging finance cost?
It’s short-term finance – you have to remember that. It’s not like a normal mortgage, and as such, the interest rates are normally higher than on standard mortgages. They can vary, so I won’t quote rates today because they change on a day-to-day, month-to-month basis.
The cost will depend on your Loan to Value of the property – which is how much you want to borrow against the value. Your credit profile, the location of the property and your other circumstances involved also drive the cost of the loan.
You should budget for 1% to 2% of the loan amount in lender fees. There will also be valuation fees and legal fees to pay. Some lenders also charge an exit fee occasionally, but others don’t.
There are usually some broker fees or adviser charges involved. It can be expensive, but this is emergency protection against the chain collapsing. If you’ve already spent thousands getting ready to buy a property and you want to continue with the purchase, this is a good option to ensure it all goes through.
What else do we need to know about chain break bridging finance?
It can be quite complex, and not many lenders will do this directly with you. You would normally need a broker or someone to advise on and arrange it.
A broker will also identify whether a bridging loan is genuinely needed or if there is an alternative to look at. It might be that something else could work. Until we understand the circumstances, we don’t know what that looks like. We work with different lenders to get some propositions together for you.
Key Takeaways:
- A chain break bridging loan is emergency, short-term finance for when a property chain collapses (e.g., your buyer pulls out) or to buy a new property before selling your current home.
- Minimise risk by ensuring all parties have funds and mortgage offers, working with communicative solicitors and conveyancers, and providing all required paperwork quickly.
- The process starts with an experienced broker who assesses affordability, loan size, and your crucial exit plan (the strategy for repaying the loan).
- Gather details and valuations for both properties, mortgage information, evidence of the sale/exit strategy (e.g., Memorandum of Sale), and personal financial/ID documents.
- Expect higher interest rates than a standard mortgage. Costs depend on Loan To Value and credit profile, and you must budget for various fees, including lender, valuation, legal, and broker fees.
YOUR HOME IS AT RISK IF YOU FAIL TO KEEP UP PAYMENTS ON YOUR MORTGAGE OR ANY OTHER LOANS SECURED AGAINST IT.