How do I break the housing chain?
Being stuck in a chain can be stressful and expensive – and mean you don’t get the home you want. If just one person drops out, then the whole chain can collapse, and you and everyone else on it can be back to square one. Fortunately, there are things you can do to break housing chains – at a price.
The advantages of breaking the chain
Breaking the chain is good because:
· It makes house buying far more predictable, and you are not subject to events beyond your control. It is very frustrating to lose the house you want, and thousands of pounds, because someone you have never met can’t arrange a mortgage.
· It puts you in a strong position when buying. Many sellers would prefer to take a buyer who has the cash in the bank than enter a waiting game where their sale is dependent upon you finding a third party to buy your house.
· You are less likely to be gazumped. If you put in a decent offer the buyer is unlikely to take another if it means entering a property chain.
There are three main ways to break the housing chain:
· selling before you buy.
· getting 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
Selling and then renting can be stressful, but being in a chain, being gazumped, or feeling you’ve undersold can be just as stressful..
· You remain in control of the sale of your own house – because you won’t need to make a quick sale, you will not be pressurised into selling cheaply.
· Those with time on their side are usually in the strongest negotiating position.
· You may get a better price when you buy a new property if you find a seller who is keen to move quickly.
· You will know exactly how much you can spend because you’ll have the money from your sale in the bank – buying your new home won’t be dependent on you achieving the expected price on your existing one.
· If prices are falling, then houses get more affordable as you wait.
· If you sell first, expecting to be able to buy quickly after, you may be disappointed and instead have to rent for a time, which can prove very costly.
· If prices are rising fast, by the time you’ve sold your house and sorted out somewhere to rent, a new house will be much less affordable. For example, if you rent for a year, and prices rise by 20% in that year, than you be able to afford 20% less.
Getting a bridging loan is risky, and not cheap. But, if you have found that dream home and need to put down a deposit for the mortgage then it might just be worth temporarily getting a short-term loan secured against your property, and paying it off once you sell.
· It breaks you out of the chain.
· Demonstrates to the buyer that you are serious about buying.
· Let’s you buy that dream house.
· Bridging loans are high interest.
· If you can, only sign for a bridging loan once you have exchanged contracts – if you get one before and then get 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 builds up. Have your property on the market before and ensure that there is some interest in it before taking out a huge bridging loan.
· If interest is not high you may be under pressure to accept a lower price for your old house 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 – only get a bridging loan if you hold most of the equity in your current property.
Extending the mortgage on your existing home
One way to break a chain is by extending the mortgage on your existing home and using that money as a deposit for the mortgage on the new property, possibly with a mortgage on your new property that is larger than you would otherwise need. You can then either:
· Rent out your old home, and use the rental income to pay the mortgage on that property. This can be a good investment property. 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.
· Sell you old home at your own pace. You will have two mortgages for a while, but you will be able to use any profits from the sale of your old house to pay off some of your new mortgage.
You can only do either of these if you have a low loan to value ratio (LTV ratio) on your existing mortgage. If you don’t, you will not be able to extend your mortgage enough to pay for a deposit on your new house.
· If you can use this tactic you will break the chain, making it more likely that you will get the house you want.
· Arrange to extend your mortgage as soon as possible, but only do it once you have exchanged contracts – if you get gazumped you will end up with lots of debt capital which is just accumulating interest.
· Try to avoid mortgages with early repayment penalties or you will be lumped with extra costs when you go to pay off some of the mortgage on your new house.
· If you have trouble selling your house afterwards you may end up owing lenders more than you can afford every month – have your property on the market already.