Getting tough on bridging

People moving house are finding it more difficult to get bridging finance when buying a new home. Until recently, many people chose to buy a new home before selling and invariably borrowed the amount needed for the new home.

This has been very popular as many of the lenders dropped their rates for bridging quite dramatically to capture the new business. As a general rule, this finance is available at around the same cost as their standard variable rate.

But the problem is that many homeowners are finding that they are taking far longer than expected to sell their own home. On average, according to the banks, homes now sell in about three or four months. Early last year the average was about one month.

However, there are quite a few exceptions, with many people now effectively paying two mortgages for up to nine months or even longer.

The banks have many borrowers on their books who may have bought homes as far back as last June but who have still not managed to sell their original home. Many could be facing financial trouble.

As a result, this so-called "open bridging" is now considered high risk. Some lenders still leave it up to the customer to decide whether or not to avail of it.

However, many others are tightening up on the criteria of who is and is not in a position to avail of this. Some banks are insisting on a so-called "sensitivity analysis" when a customer requests bridging. The analysis is designed to evaluate how the borrower would cope if the house fails to sell for three, six and even nine months.

The findings are likely to be an area which the Central Bank will begin to focus on.

Apart from the difficulties of actually getting bridging in the current market, it probably makes more sense not to go for it in the first place. Instead, those planning to move house should first find a buyer before purchasing.

When the housing market was stronger than at present, buyers often made a commitment to buy in the knowledge that their old home would sell without any difficulty.

This gave them a free hand to go house-hunting as soon as they decided to move.

But with the market cooling down, finding a property is not the problem it once was and it would be safer to have funds in the bank for when you see the right property.

Another problem for those buying first and selling later is price expectations. Some people are finding they have to sell their home for £20,000 or even £40,000 less than they were expecting. For many on tight budgets that can create difficulties, particularly if the new home is already paid for.

Of course people do have the option to let their first home in the hope of eventually getting a higher price for it. But that can mean two mortgages-not a very attractive proposition particularly when it is not possible to offset rental income against the mortgage on the rented home.

MANY potential buyers will also have been disappointed last week when the European Central Bank failed to cut interest rates, which still stand at 4.75 per cent. This move is still expected. According to Mr Jim Power, head of investment at Friends First, the ECB is likely to cut half a percentage point off interest rates when it meets on April 11th. But others are less optimistic and some believe that any reduction will not materialise until June.

Whichever is true, it seems that with the current slowdown in the US and indeed Japan, the ECB will have no choice but to act the good global citizen by cutting rates sometime soon. Variable rates will fall as a result.