Paul and Sam decided to sell their two-bed Victorian terraced house in Dublin 8. After pay increments at work, with both working from home and having adopted a dog, they wanted more space. They accepted a generous €750,000 offer for their place – but when their buyer forced a quick closing, the pressure was on.
Rather than lose the sale and jeopardise the purchase of their new home, Paul and Sam were out. Five months of costly short-term renting, couch-surfing, expensive furniture storage and kennel fees followed. Along with a whole lot of stress.
Could a bridging loan have made things easier?
What is a bridging loan?
A bridging loan enables to you to purchase a new home before your existing property has sold. It means you can bridge a temporary financial gap, without plunging into an interim renting or couch-surfing scenario.
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Bridging loans aren’t new, but having disappeared after the property crash, they’re back.
The idea is you can apply for a temporary loan based on the value of your home, use this money to buy a new pad and then pay it back when you’ve sold your old home.
Anyone who has tried to sell their home in Ireland and buy another at the same time will know there’s a gap in the market for this. The process has evolved into its own unique form of masochism. It’s no wonder there are so few homes for sale.
The upside of a bridging loan is that you, your kids, your dog and your stuff can hang tight in your existing home, albeit paying interest on a bridging loan, until you get the keys to your new one.
It obviates that dreaded gap between homes, and the associated palaver and cost of moving your furniture into storage only to move it all again when you find your new home.
How does a bridging loan work?
Just two lenders are offering bridging loans right now – Bank of Ireland and ICS. Instead of giving you a loan based on the usual lending rules for movers at 3.5 times income, these banks will give you a loan based on a percentage of the value of your existing home.
ICS is offering a bridging loan that it says is suitable for those looking to trade down to a smaller or less expensive home, but it’s possible to use it to trade up too, the lender says.
Finance is available for up to 70 per cent of the value of your existing home.
There is no minimum loan term, and the maximum term is 12-18 months. The interest rate, however, is a hefty 10 per cent, with a 1 per cent “arrangement” fee.
Could thiswork for people in the position Paul and Sam were in? They could apply for a bridging loan from ICS of 70 per cent of the €750,000 value of their existing home, or €525,000.
Unless they have a significant deposit, however, or their new home is in a less expensive area, this is unlikely to be sufficient to buy the property.
The interest at 10 per cent, for a period of three months, would work out at €13,125. The 1 per cent arrangement fee comes to €5,250, bringing the total cost of borrowing to €18,375.
Compared with paying for a short-term rental property in Dublin, if you can find one, furniture removal, storage and some dog-minding over three months, not to mention the stress and uncertainty of an interim move, the price will be worth it for some.
Bank of Ireland’s “trade-down” bridging loan is more squarely aimed at downsizers, so Paul and Sam need not apply.
This bank will lend just 60 per cent of the value of your current home.
Mortgage broker Michael Dowling of Irish Mortgage Brokers gives the example of someone downsizing from an €800,000 property to a €500,000 one. Bank of Ireland would loan you €480,000 in bridging finance.
A loan of 60 per cent will not be enough for many trading down to buy in their own area, as many want to do. It will be a better option for those moving to a less expensive location.
The rate is 7 per cent with no arrangement fee. So over three months, you’d pay interest of €8,400 on a loan of €480,000.
Bear in mind that the bank takes both properties, your existing property and the one you are moving to, as security for the loan, Dowling says.
“They’ll have a €800,000 property and a €500,000 property as security, which is €1.3 million, but they are only lending you based on 60 per cent of the value of your current home – so unless your numbers stack up, that to me will be an issue that people have to be concerned about,” he says.
It isn’t a requirement that someone has signed a contract to buy your home, Dowling says.
“Personally, I wouldn’t take the risk of buying another property, even though funding is available, unless I had a signed contract on my own property,” he says.
“Because then I know I have a buyer, we have an agreed closing date ... I wouldn’t get involved with bridging unless I had a signed contract for my own property.”
If you have signed a contract for the sale of your own home and the sale is due to complete in September, for example, you have time find another property, Dowling says.
But with bridging loan interest rates double and triple some other mortgage rates, anyone taking out this kind of loan will want to keep the term as short as possible.
Who might the new bridging loans suit?
If you are selling your home in Dublin for €800,000 and buying a new one in Wexford for €450,000, a bridging loan charged at 7 per cent over three months is going to cost you €7,875.
Is there any bridging loan light at the end of the tunnel for up-sizers such as Paul and Sam? Bank of Ireland says it is “exploring other product innovations focused on supporting expanding families to trade up to a larger property”.
In the year to February, former owner-occupiers comprised more than 50 per cent of those purchasing a home, according to figures from the Central Statistics Office, so there should be interest.
Chain gang
It can be “extremely challenging” for people to sell their home and buy another, says Graham Murray, head of residential at Sherry Fitzgerald.
The country’s biggest estate agent is seeing its highest level of these chain sales for “a number of years”, Murray says.
In a sellers’ market, presenting yourself as a credible buyer is critical.
“You might get your house ‘sale agreed’, and even go farther to exchange contracts, close and rent for a period of time, so that when the next right home comes on the market, you are in the strongest possible position as a buyer,” Murray says.
“You could be sitting there, money in the bank, mortgage-ready and renting, so as an attractive buyer you are in a great position,” he says.
That’s a lot of upheaval, however.
A bridging loan could put you in the same pecking order, without having to close the sale of your existing home straight away, so it gives you a bit more flexibility, Murray says.
“Any kind of product like that is welcome because it will alleviate a lot of pain and uncertainty around your move,” he says.
“You really are waiting for this one house to come along, and then all of sudden you are competing with the buyer who has already sold their home and has finance ready, is returning from abroad or someone with cash,” Murray says.
A bridging loan could put you in the running with this type of buyer, he says.
Until more attractive bridging loans are available for those trading up, the likes of Paul and Sam will just have to do their best to work the chain, dovetailing the sale of their existing home with buying another.
It’s a high-stakes game of Jenga, where all the moves interlock and things could come crashing down at any moment.
Prepare by engaging a solicitor and getting the title documents of your home released from your bank early, Murray says.
If you’ve done structural work, pull together the compliance certificates a buyer will look for. Engage an estate agent, have the property measured and photographed and sign off on the marketing materials, he says.
“Get ‘button-ready’ so when the right house comes up, you can flick a switch and the next day your home is on the market. If you are buying subject to the sale of your own home, you want to be able to show the agent you are engaged in the sales process,” he says.
Sales are taking three to four months at the very least but be prepared for it to take up to six months from when the For Sale sign goes up outside your home, he says.
Have your solicitor get the paperwork ready so that when you go sale agreed, contracts can be issued within 48 hours and you can get a booking deposit in, Murray says.
“If you haven’t done any of that work, you are at least four weeks away from issuing a contract, so you’ll shave a month off by getting this work done beforehand.”
For some trading up, agreeing a late closing on the sale of their own home can buy them the time to secure their next one.
Others trading up may value speed and avoid a buyer in a chain, instead prioritising offers from more agile first-time buyers, someone who has already sold up, or a cash buyer, Murray says.
“You can have what’s called a ‘three-way closing’, where the sale of your property coincides with the purchase of the property you are moving to,” Dowling says.
“It’s not unusual, but it requires a bit of work on the side of three solicitors – your solicitor, your buyer’s solicitor, and the solicitor for the property you are buying – but it can be done.”
As a seller, you can control the closing date of your property, but it’s the reverse for the property you are buying, Dowling says.
“You just hope that the dates can coincide so that the day you move out is the day you move in and you avoid the gap in between.”
