"Buyers are becoming increasingly hesitant about completing purchases and sellers are withdrawing due to delays, resulting in a decline of sales and an increase in property chain breaks"
1 in 8 property fall-throughs in Q1 of 2023 was attributed to issues securing a mortgage. With 800 mortgage deals pulled as lenders react to anticipated interest rate hikes, available mortgage rates set to rise further and residential transactions drop by 25%, it comes as no surprise that chain breaks are set to increase.
The process of buying a property can be a stressful one for those involved, so much so that it sits side by side with death and divorce in polls for the most stressful life events. It can be all-consuming with a tremendous amount of money, resources and time invested in finding the right home.
Unfortunately, in recent years this stress has increased as problems with the mortgage process, such as the volume of mortgage deals being pulled and the abolishment of key affordability tests (for example, if borrowers could meet repayments if interest rates were to increase above the standard rate of 3%), have caused an increasing amount of property chains to collapse as the process exceeds the agreed timelines.
The UK mortgage market is in turmoil. What started as a fiasco as a result of the “mini-budget” in September last year, is now something of a disaster. Interest rates have continued to rise, as inflation dropped less than anticipated to 8.7%.
Without warning lenders have withdrawn 10% of mortgage products in anticipation of further interest rate hikes. And of those that are available, mortgage rates are skyrocketing, with the average two-year fixed deal rate reaching 5.72%, compared to the beginning of May which stood at 5.26%.
Mortgage approvals are on a downward trajectory, set to fall to similar levels last seen in the financial crash of 2008. As a direct result, many will be affected by lenders' decisions to pull their mortgage deals. 1 in 3 property sales falling through in 2022, according to Quick Move Now and this only looks set to increase.
Dealing with a broken property chain caused by mortgage delays can be challenging, but there are options available to help resolve the situation. One effective solution is the use of bridging loans. Bridging loans have grown in popularity since the 2008 credit crunch, where traditional lenders were reluctant to lend.
With bridging loans, buyers can access fast funding to keep their property chains intact and continue with their property purchases while waiting for mortgage issues to be resolved.
A spokeperson from Finbri said: “As the UK economy remains uncertain and the mortgage market faces a downturn, property chain breaks will rise. Buyers are becoming increasingly hesitant about completing purchases and sellers are withdrawing due to delays, resulting in a decline of sales and an increase in property chain breaks.”
Why do property chains break?
A housing chain refers to a series of linked transactions involving buyers and sellers, where the sale of one property is dependent on the sale of another. There are several reasons why chains break, including:
Mortgage difficulties: With many lenders removing fixed products, buyers may struggle to secure a mortgage or choose to wait for interest rates to decrease before proceeding.
Unforeseen survey issues: Property surveys can uncover costly repairs that need to be addressed, leading buyers to reconsider their decision and potentially withdraw from the purchase.
Personal circumstances: With house prices dropping, there is uncertainty in the housing market and concerns can lead to sellers having a change of heart about selling their property or facing circumstances that make it financially unfeasible to proceed with the sale.
In addition, situations like gazumping (accepting a higher offer from another buyer) or gazundering (reducing the offer at the last minute) can also contribute to chain breaks.
According to a survey conducted by Property Rescue, around 20% of homeowners are hesitant to list their homes due to concerns about gazumping, and a third believe there is a high risk of chain breaks.
However, given the ongoing turmoil in the mortgage market, most property chain breaks are likely to be a result of buyers being unable to obtain a mortgage or sellers choosing to postpone their sale until the market stabilises.
Bridging loan use surges by 68%, with homeowners turning to bridging finance to prevent chain breaks
From 15% in Q4 2022 to 25% in Q1 2023, the proportion of bridging loans used by homeowners to avoid chain breaks almost doubled in Q1. In September 2022, over 1,000 mortgage deals were pulled in the wake of Kwarteng's mini-budget - and more buyers turned to bridging loans to move the property purchase process forward.
Finbri's Bridging Finance Report discovered that of the respondents that used bridging to buy a residential property, 61% used bridging finance to stop the property chain from collapsing due to a mortgage delay. A combined 92% of bridging finance used for purchasing a main residential property was to prevent a property chain from collapsing. The recent turbulence in the mortgage market has been a source of increased demand for residential property bridging loans.
How can a bridging loan be used?
Bridging finance is commonly used to assist homeowners in managing the transition between buying and selling properties. It helps by bridging the gap between these two transactions and helps in situations where gazumping and gazundering are concerned.
Where sellers are eager to finalise a deal quickly so they can proceed with purchasing another property, they may accept an offer from a buyer who can provide fast payment, this is where a bridging loan can come in handy.
However, this can put buyers at a disadvantage if they need to sell their current property to afford a new one.
Bridging loans enable buyers to make a strong offer, assuring a swift sale, while the process of selling your existing property continues. The benefit of bridging finance in this scenario is that you typically only need to borrow money for a short period, usually around two to three months - typically while securing a mortgage. The interest you'll pay during this time is relatively insignificant compared to the advantage of securing the desired property.
What other options can prevent a chain collapse?
If a property chain breaks due to mortgage delays or other reasons, there are a few options to be considered:
Seek alternative financing: If a traditional mortgage is causing delays or has fallen through, buyers can explore alternative financing options such as a different lender or a different type of loan. Private lenders or specialist mortgage providers may offer more flexible options that can help secure the property without relying on a lengthy mortgage process.
Negotiate with the seller: If the property chain breaks, it's essential to communicate with the seller and explain the situation. They may be willing to extend the completion date or explore other arrangements to keep the sale moving forward. Open and honest communication can help find a mutually beneficial solution.
One thing is for certain, with increasing rates and mortgage turbulence as lenders pull deals with little to no notice, broken property chains are going to provide a real and significant danger for many house buyers and sellers.
