PICTURE the scene. You’re moving home, and you’re in a chain. That is to say, you’re selling to someone who’s selling to someone else. The deal is days away from exchange, and then you get the phone call. The estate agent telling you that your buyer is having to withdraw from the transaction.
Your first thought is that you’re going to lose the dream home that you’re currently trying to buy.
Your second thought is the amount of money you’ve racked up so far on solicitor’s costs and surveyor’s fees that you’re about to lose.
Believe it or not, on average currently one in three chain-based transactions fall through in the UK, and although the reasons why vary, the consequences are normally always stressful and expensive.
So, if this happens to you, what are the options available if you still need to move and don’t want to miss out on the property that you’re aiming to buy?
Firstly, it may be possible to keep the property that you were going to sell, remortgage it to release enough equity to make your onward purchase, and then keep it and let it out.
This course of action makes you a landlord, albeit an accidental one.
It’s is a common way to deal with such a problem, particularly in areas where there is high demand for rental housing.
If this route appeals, you’ll need to get professional mortgage advice to ensure that the numbers stack up, and that you have the correct mortgage in place for both properties.
It’s not a cheap solution, as you also need to bear in mind that if you’re keeping your existing home and letting it out, then you’ll pay an additional 3% of Stamp Duty and Land Tax on the property that you’re buying.
You’ll also need to ensure that you understand the ramifications of the additional income tax you’ll pay on any rental income on the property you’re letting out.
However, for some people whose individual circumstances mean that they need to move quickly, this can be a reasonable solution, although one which requires significant research to ensure that you understand fully what you’re letting yourself in for and how much it’s going to cost you, both in the long term and the short term.
Another option is to take out a bridging loan.
This is typically a short-term funding option, used to ‘bridge’ the gap between when you need money to purchase a property, and when you’ll receive funds on the property that you’re selling.
A bridging loan can be a very useful solution to help facilitate a transaction that otherwise wouldn’t be able to move forward, for example if a chain falls apart.
However, there are a couple of things that are important to consider.
Bridging finance is basically a short-term loan offered at a high rate of interest, which can make it an expensive option.
Secondly, you need to be really confident that your sale is going to go through, because the money is advanced to you so that you can make your onward purchase on the basis that you’ll be paying it back in full within a very short timescale, usually a couple of weeks.
A typical bridging loan is based on 1% interest per month on the total amount that you’ve borrowed, and you’ll need to have an exit plan, in other words evidence how you’re going to repay the loan and when, in order to be considered for this particular type of finance.
The other thing to be aware of is that bridging loans aren’t regulated the same way that normal, mainstream mortgages are.
So, if this is an option you’re considering it’s really important that you receive expert, professional advice from a broker who can review a range of bridging loan products for you, to ensure that the bridging finance company are reputable and that you fully understand all the fees you may be charged and how the interest on the amount you’re borrowing is being calculated.
As Brian Murphy, Head of Lending for Mortgage Advice Bureau whose best buy mortgages for home movers have been released today explains, “Being involved in a transaction where a chain breaks down can be exceptionally stressful, but there are options available to help you progress your move.
“If you decide to let out your existing property and need to remortgage to release equity in order to help fund your onward purchase, it’s likely that you’ll need a specific Let to Buy mortgage, which is a slightly different product to a typical Buy To Let mortgage.
“If you’re going to raise bridging finance, it’s essential that you get professional advice, as you’ll need permission from your existing mortgage lender to do so.
Either way, it’s crucial that you are totally comfortable with the financial implications of whatever course of action you decide, and that you can afford all the fees and repayments and additional Stamp Duty, if it’s due, before you continue.”
A third option is to sell your existing home to an investor who specialises in buying properties quickly, in order to free up your cash so that you can proceed with your sale.
Typically, if you’re using this kind of service, you’ll be offered a price that is well below the market value for your property (or BMV as its known in the property industry) for example probably only 75% or 80% of what it’s worth, but they will facilitate a transaction quickly.
Historically, this has meant that this route has really only been used by those who are desperate as a last resort, due to the amount of equity lost as a result of such a transaction.
However, there is now a welcome alternative to the typical BMV investor model.
Nested, who are a new entrant to the market, offer to guarantee up to 97% of the market value, with the additional upside that a further amount is payable to the seller if Nested are able to sell the property at or above the agreed valuation.
If the property sells at under the value guaranteed, Nested make up the shortfall, not the seller.
Nested was launched in January 2017, and don’t class themselves as a BMV investor, rather an ‘ethical estate agent who is able to guarantee that they will sell your home’.
So far, the company has successfully sold over £400million of property, enabling their clients to sell their current home quickly in order to buy another, or assist those who have been in a failed chain to complete their purchase when they’ve lost a buyer.
The cost for using the Nested service is a fixed fee of 1.5% of the selling price of the property, which is very similar to what many normal estate agents would charge, although of course the crucial difference is that Nested guarantee to sell the property once the valuation has been agreed.
There is an additional fee of up to 1.5% if the guaranteed valuation is exceeded when Nested sell the property.
The service currently operates within the M25 and covers Greater London, however the company are rolling out nationally early in 2018.
So, if you receive that phone call from the agent telling you that your buyer has pulled out, don’t panic.
There are options available. Yes, it’s awful when life throws a curve-ball like this but, by taking appropriate professional advice and researching your options thoroughly, it’s still very possible to proceed with buying that home you’ve set your heart on. Just take a deep breath and, as the saying goes, keep calm and carry on.