How to Buy Property Before Selling Your Current Home

In the UK, buying a house while selling another can be difficult. When a property chain breaks, it can cause chaos both at the top and bottom of the chain. But if a buyer backs out, how can you avoid breaking the chain?

According to Hamptons, in 2022, 73% of all buyers were left without chains, compared to 69% in 2021 and only 65% in 2010. This may be due to an increase in chain breaks in 2021, which forced buyers to seek alternative funding methods to avoid being affected by a chain break.

Given the reasons for chain breaks — from gasamping to gazumping (when a seller accepts an offer from a buyer), it's no surprise that Scotland has redrawn the boundaries of property buying and selling processes. If you are in a chain, making an offer in Scotland is simply impossible because you risk losing your deposit if you fail to fulfill obligations.

So, if you're considering buying the next home before selling your current one — here's how to do it.

Use Alternative Financing for the Next Home?

Bridge financing is a short-term loan secured by property, usually lasting no more than 24 months. Since the loan is secured against property, the lender's capital is protected, so the conditions for obtaining such a loan are significantly easier than standard mortgage loans. While typically provided when purchasing new housing, it is also possible to obtain a loan against existing property — all depends on the circumstances.

What is Bridge Financing and How Does It Work?

Bridge financing, often called a bridging loan in the market, provides borrowers with funds for virtually any purpose, including home purchase. It is a type of short-term loan that allows sellers to complete property transactions. Effectively, this makes you a cash buyer — one of the best positions when buying property.

As Stephen Clark from bridging loan broker Finbri explains, "Bridge financing is a versatile financial tool that can be used to quickly obtain funds in case of unforeseen financial needs to cover a financial gap."

Bridge financing is a short-term loan secured by either a first or second charge on property, typically lasting between 12 and 24 months. These short-term bridging loans effectively make you a cash buyer, meaning there's no need to sell your old home before purchasing the new one. The rates you will pay are higher than standard mortgage rates, as lenders consider them riskier and they depend on a number of factors. The loan-to-value ratio, type of property, location, and condition are all taken into account by the lender.

Since interest on the loan is often rolled into the principal, monthly payments are usually not required — only one large payment at the end of the loan term. This is why having a viable repayment plan is critical, and lenders should only approve your application if such a plan exists. For borrowers, the absence of monthly payments has two consequences. First, the borrower is freed from debt servicing pressure for the entire loan term. Second, all that interest accumulates over the full loan period, resulting in a significantly higher average interest rate because you are effectively paying interest on interest from the previous month.

Is There a Difference in the Process of Buying Property When Using Bridging Loans?

The simple answer is yes. The main difference lies in the fact that with bridge financing, you will be considered more like a cash buyer rather than someone waiting for the completion of your property sale. Bridge financing does not require waiting for a buyer or an offer on your property. In other words, instead of the standard mortgage loan, you rely on a bridging loan to finance your purchase.

How Does Repayment of a Bridging Loan Work?

At the end of the loan term, you must repay it. Sometimes these methods are called exit strategies or repayment plans. Most people applying for a bridging loan want to buy property before selling their existing one and plan to repay the loan with proceeds from the sale of their current home.

Should You Work Through a Bridging Loan Broker or Directly with the Lender?

When considering a new bridging loan, several important aspects must be taken into account, and whether to use the services of a bridging loan broker should be one of the first questions. We will look at the advantages and disadvantages of working with a broker:

Advantages of Working with a Bridging Loan Broker

The main advantage is that the broker will help you get the best bridging loan. They are well-versed in the market and can direct you to lenders offering the best rates and terms. Brokers have access to a wide range of funding sources, including specialized lenders, family offices, and private investors, helping find the right lender for your needs. They also assist borrowers in avoiding common problems when applying for a bridging loan.

One Clear Disadvantage of Using a Bridging Loan Broker

The main disadvantage of using a bridging loan broker is the commission they usually charge. This can cost from several hundred to several thousand pounds, so compare offers and ensure that the costs will be offset by savings you gain before choosing a bridging loan broker.

If you're considering getting a bridging loan, it's better to first talk with a bridging loan broker since their advice and information are provided without any obligation to use their services. Most reputable brokers will also provide you with a detailed offer without requiring any commitment. You can find a free list of respected bridging loan brokers and lenders in the UK at bridgingloan.org.uk — this is the Association of Bridging Loan Brokers and Lenders in the UK.

Go Directly to the Lender?

While you'll avoid broker fees, you might not get the best rate because lenders are known for not always thinking outside standard approaches. Lenders are accustomed to receiving proposals from brokers who present the deal in a way that allows lenders to quickly and easily see its value.

If a borrower approaches the lender directly, which is not interested in the deal, feedback from the lender often isn't provided. This leaves the borrower in a difficult position.

The main advantage is that there will be no broker fee. However, this is often compensated for by the fact that the borrower does not get the best rate because they haven't tapped into the entire market to create competition for their loan.

All these scenarios and criteria should be considered when trying to buy property before selling your current one.