When looking to buy or sell property, there are many potential challenges, one of which revolves around the transaction chain. This is a sequence of linked house purchases/sales which need to be completed in order so that others can move on. The longer the number of participants in the chain, the more potential problems and the chain could even break. The consequences of a broken link in any chain can be catastrophic for all of those connected.
Thankfully, all is not lost, and there are ways and means of chain breaking to ensure you can buy your dream home.
Most common reasons why house sales fail
It is essential to recognise that broken property chains are only one of the reasons why house sales could fail. The most common reasons are:-
- Change of mind
- Change of circumstances
- Broken chain
- Mortgage funding problems
Estimates suggest that around 31% of property transactions will fall through, with a significant number caused by a broken chain. Approximately 21% of house sales will fall through once, 7% will fall through twice, and 3% will fall through three or more times before completion. To put this into perspective:-
- House sales with no chain have a 24% chance of falling through
- Where there are two houses in the chain, this increases to 42%
- If there are three houses in the chain, the figure is 56%
While these are only estimates, with accurate information difficult to find because of the length of chains, they offer a useful reference point. This is one of the reasons why first-time buyers and cash buyers are so eagerly sought after by those looking to sell their homes.
Case study
To demonstrate the impact of a property chain and ways in which you can break the chain, we will look at a case study. The situation is as follows:-
Homeowner: Young family
Property value: £500,000
Outstanding mortgage: £250,000
Equity content: £250,000
Proposed property purchase: £500,000
When looking to move home, the process is relatively simple: arrange the sale of your existing property and, at the same time, purchase a new home. If you require mortgage finance to buy your new home, there are two options:-
- Port your existing mortgage
While not all mortgages are portable, which means you can transfer security from one property to another, this can be an option. You would still need to go through the traditional process of arranging various reports and a valuation to support the porting of your mortgage.
- Repay and remortgage
Most people will repay their existing mortgage and take out a new one when moving home. It may be that they cannot port their mortgage or require more/less funding. Alternatively, they may find more attractive terms and conditions with their current lender/other mortgage providers.
How long is a mortgage quote valid?
When looking to repay an existing mortgage and take out a new one, it is vital to be aware of the timescale. Typically, a mortgage quote will be valid for three months, although this can be up to 6 months on occasion.
There can be differences in the starting date for different mortgage providers. Some may count day one as the application date, while others look towards the offer date. Either way, once you have a mortgage in principle, the clock is ticking, and the last thing you want is to get stuck in a chain. We will now take a look at ways in which you can break the property transaction chain. This will allow you to secure the sale of your existing property and purchase your new home.
Is chain breaking easy?
Even though taking yourself out of a property chain does not guarantee the first-time sale of your property, your chances are greatly enhanced. There are numerous ways in which you can break a property transaction chain.
Seek chain-free buyers
As we touched on above, first-time buyers are highly sought after by those looking to sell their homes. However, property investors, those looking to acquire second homes and companies that acquire homes relatively quickly can also be helpful third parties.
In recent years there has been a significant increase in the number of transactions involving chain-free buyers. Depending upon the competition for property in your area, you may need to consider a relatively small discount on the market price. However, this is only sometimes the case, and it is essential to consider the added carrying costs, such as mortgage payments, the longer it takes to sell your property. In many cases, a relatively small discount (or lack of a premium) can be overshadowed by potentially high/unaffordable carrying costs.
Benefit: Sale proceeds available much quicker
Seek chain-free sellers
While a chain-free buyer has the potential to remove any delay in the sale process, you should also look towards chain-free sellers. There are certain sellers in this category, such as those with vacant homes, unwanted investment properties, and second homes and those who have taken action to make themselves chain free. This is the perfect scenario for your property transaction, a buyer not held back by a property chain and a seller not committed to a new property purchase.
You may find that some sellers advertise their property as a chain-free transaction. However, even if this is not the case, there is no harm in asking the question of the homeowner or the estate agent. Remember, if you are both chain free, there is benefit to both parties.
Benefit: Removal of potential delay in buying target property
Consider short-term private rent
During these challenging economic times, there will be situations where homeowners are struggling to pay their mortgage although they have equity in the property. In this situation, in order to consider other properties (potentially downsizing), it may be sensible to remove yourself from the forward chain. This can be done by selling your property as soon as possible and then moving into short-term private rental accommodation until you can secure your new home.
While there will be additional accommodation costs between moving homes, this will remove potentially challenging mortgage payments. In addition, releasing equity in this manner would reduce financial pressure and give you more time to think about your next move.
Benefit: Secure sale proceeds
Buy before you sell
At first glance, many people will take a step back at the suggestion that you might look towards buying your new property before selling your existing home. However, some people may have a financial situation which allows them to take out a second mortgage or pay for all or most of the second property in cash. For the vast majority of homeowners, not in this position, there is another option!
Benefit: Secure purchase of next property
Bridging finance
While some people have an understandable fear of taking on additional debt before selling their existing home, there are many misconceptions about bridging finance. As the term suggests, this is a means of bridging the gap between selling a property and purchasing your next home. So how does it work?
- What is bridging finance?
Before we look at how bridging finance would work in this case study, it is crucial to appreciate the various elements of this type of funding:-
Finance: Potentially into the millions of pounds dependent on security
Loan to value (LTV) ratio: Up to 70% of collateral value
Interest rate: Circa 1% a month
Payment terms: Interest paid monthly or rolled up and repaid with capital when property sold
Duration: Fixed or open-ended
It is essential to recognise the options regarding interest paid on a bridging. It makes sense to pay interest monthly with the capital repaid on the sale of your property. Unfortunately, some homeowners will not have sufficient free income and will need to roll up the interest. They would then repay the accrued interest and capital at the end of the arrangement.
In the second scenario, you need to appreciate the added expense of interest on interest. Each monthly interest payment would be added to the capital outstanding, meaning that interest for the next month will be calculated on a higher capital value, and so on. The impact of interest on interest over several months can be significant.
While bridging finance is relatively expensive compared to mortgage finance, it should be considered a short-term solution. Depending upon the timing of the sale of your property, you could be in a position to repay bridging finance within a matter of days. Alternatively, it could be anything up to 12 months.
How can you use bridging finance?
There are several scenarios to consider when using bridging finance:-
- Existing mortgage
In this case study, the homeowner has £250,000 of equity in their home and an outstanding mortgage liability of £250,000. To acquire another property worth £500,000, they would need to use the target property and equity in their existing home as collateral. This would total £750,000 with a £500,000 bridging finance loan equating to a 67% LTV. This is within the maximum 70% LTV ratio and would, in theory, be feasible.
When sale proceeds are received, they will be used to repay the outstanding mortgage with the additional funds used to repay part of the bridging finance. This would leave circa £250,000 bridging finance outstanding, which would be repaid when the new home was mortgaged. This would leave the homeowner with a circa £250,000 mortgage and equity of the same value in the new property.
- No mortgage
If the existing property had no mortgage liability and £500,000 of equity, there could be an alternative route. Depending on your ability to effectively finance the running of two homes for a relatively short period, you could go down the mortgage route. There would be the option to fund a 30% deposit via bridging finance, with the additional 70% funded through a traditional mortgage.
Once the original property is sold, the £150,000 bridging finance will be repaid. There would also be the option to repay part or all of the mortgage finance, leaving the property potentially debt free. For those approaching later life, this can be an opportune moment to release equity from the property as long as they can afford the mortgage repayments. Alternatively, they could downsize to a new home valued at less than the equity content, leaving savings in the bank.
Don’t underestimate the impact of property chains!
While property chains are only one of the risks to the scheduled completion of a house sale, they are pretty prominent. However, there are ways and means by which you can mitigate the risk. Either by taking yourself or the buyer out of a chain. Bridging finance is, for many people, a viable option but one which often prompts concern, with many reluctant to take on further debt. However, it is essential to consider bridging finance in terms of cost and facilitating the purchase of your new property. By removing short-term pressure to sell your existing home, this may allow you to negotiate a higher price.
Here at Greenfield Mortgages, we can advise you on the best course of action for your situation. It is important to take financial advice as early as possible, to plan for potential issues further down the line.