Being stuck in a housing chain can be both stressful and expensive. That often means you won’t get the home you want. Imagine if just one person drops out in a property chain, the whole chain is likely to crumple; in that case, you and everyone else on it will be back to the drawing board. Luckily, there are things you can do to break housing chains though they all go at a price.
Why break the housing chain?
When you let it loose …
- It makes house buying far more certain, as you will not be subject to events beyond your fingertips. That will enable you to curb the loss of thousands of pounds as you will be autonomous.
- It puts you in a formidable position when buying. Most sellers would prefer to engage a buyer who has the cash in his/her bank than sign into a waiting game where their sale is dependent on finding a third party when buying their house.
- You are less likely to be gazumped. If you settle on a decent offer the buyer is unlikely to take another when contrasted with a property chain.
Here are three main approaches to break the housing chain:
- Sell before you buy.
- Get a bridging loan.
- Retaining it, but increase the mortgage on a different existing property to use as deposit.
- Selling before you find a house to buy
Selling and then renting is often stressful; similarly, being gazumped or feeling undersold by a property chain is just as stressful. When you sell before you find a house to rent, you will enjoy the following:
- You remain in control of the sale of your own house. That means, you will not be pressurized into selling cheaply as you won’t need to make a quick sale.
- It gives you a strongest negotiating position if you have adequate time.
- You may get a better price if you buy a new property and find a seller who is keen to move in quickly.
- You will know exactly how much you can spend because you’ll have the money from your sale in the bank. Thus, buying your new home won’t be dependent on 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 instance, if you rent for a year, and shoot by 10% in that year, than you be able to afford 10% less.
- Bridging loans
A bridging loan is often 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
- They have high interest rates.
- If you get one before you have exchanged contracts and then get gazumped, you will have wasted a lot of money can.
- If you be unable to sell the house soon after taking the loan, you may struggle to pay back the loan as the interest builds up. Always have your property on the market 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. Thus, only get a bridging loan if you hold most of the equity in your current property.
- Extending the mortgage on your existing home
The other 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. You can then either:
- Rent out your old home, and then 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.
Such is applicable to one with a low loan to value ratio (LTV ratio) on his/her existing mortgage. If not, one will not be able to prolong his/her mortgage enough to pay for a deposit on the new house.
- Allows you to break the chain by making it more likely that you will get the house you want.
- If you get gazumped before exchanging contracts, you will end up with lots of debt capital owing to the accumulating interest.
- Mortgages with early repayment penalties may attract extra costs when you go to pay off 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 monthly. Thus, have your property on the market beforehand.