Chain break finance

Chain break finance lets you buy a new home before you’ve sold your old one. We look at how it works and what you need to consider before taking it out.

Moving home can be one of the most stressful events you’ll experience and being in a property chain only adds to the stress.

Unless you’re a first-time buyer, you’re probably not in a position to buy a new home or get a mortgage on it until you sell your old one. If your buyers and the people you’re buying from can’t either, and this continues on either side of them, you could find yourself in a lengthy property chain.

This means that no transactions can take place unless they all do, and if someone drops out for any reason – for example, they can’t get the mortgage they were hoping for or they change their mind about selling – the whole thing can break down, leading to lost money spent on surveys and legal fees along with shattered dreams.

If there’s a problem with the sale of your property that means you might have to pull out of buying your new one and break the chain, there is a solution – chain break finance.

What is chain break finance?

Chain break finance is a type of short-term finance also known as a bridging loan. This is designed to bridge a funding gap so you can pay for something before you have the intended funds to do it – in this case, to buy a new home before you have sold your old one.

The loan essentially turns you into a cash buyer, so if your buyer has to pull out, you can still go ahead with your purchase and avoid losing your dream home. You then pay back the loan once your property is sold and you can get a mortgage on the new property if you need to.

As they are quick to arrange, you can also use chain break finance to buy a property quickly if you find your perfect home but don’t want to wait until you can sell your current one.

Being a cash buyer will put you in a stronger position than others, which could mean your offer is more likely to be accepted. You might even be able to negotiate a reduction in the price as you’ll be a safer bet than a buyer who is reliant on selling their home or getting a mortgage.

How does it work?

You take out the loan only until your existing property is sold. Once it’s sold, you then pay the loan back. It will usually be secured on your new home if you still have a mortgage on your old one, but it could be secured on your old property if you have enough equity in it. You can usually borrow up to 80% of the property’s value.

The term of the loan can be as little as one month, but you may need it for six months to a year to give you enough time to sell your old home. Interest rates are higher than for mortgages because it’s a riskier proposition for the lender, so the shorter the term the better. The higher the proportion of the property’s value you borrow, the higher the interest rate is likely to be.

Bridging loans can either be closed or open – closed loans have a fixed repayment date and are the cheapest type while open ones have more flexibility on when you can pay it back.

Although the lender will look at your finances and credit history when deciding whether to lend to you, it will focus mainly on whether your exit strategy (how you plan to pay off the loan) is viable. Your lender will want to be sure that your old home can be sold for enough money and quickly enough for you to be able to repay the loan at the end of the term.

If the loan is secured on your new property, the lender will also want to make sure its value is high enough to cover the loan since your lender will repossess and sell the property to get its money back if you can’t pay back the loan. However, you will often be able to renew or extend the loan to stop this from happening.

Chain break finance is quick to arrange, so you’ll usually have the money within one to two weeks.

Is chain break finance safe?

As with any loan secured on property, there is always the risk that you could lose your home if you can’t pay it back, but if the lender has made sure that your exit strategy is likely to be successful and lets you renew or extend the loan if necessary, this is unlikely to happen.

You’ll also have to keep paying for your mortgage as well as the interest on the bridging loan, but you usually have the option to “roll up” the interest rather than making monthly repayments and pay it all off with the loan at the end. Alternatively, the full interest amount can be taken from the loan at the outset.

The longer you have the loan, the more interest that will accrue, so you should look at how much this is likely to be to make sure you can afford it. You may also have to pay an arrangement fee to the lender.

If the loan is secured on a property that is or will be your home, it will be a regulated bridging loan. This means it will be regulated by the Financial Conduct Authority and will have to be sold to you according to the mortgage rules. You’ll have to be given clear information and advice by the lender or broker selling it to you to make sure you’re not taken advantage of.

Speak to a broker specialising in bridging loans to get the best deal for you.

Bottom line

Chain break finance allows you to go ahead with buying a new home if there’s a delay in selling your existing one, but make sure you’ll be able to afford the interest costs beforehand as it’s a relatively expensive way to borrow.

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