Leading short-term loan provider, MT Finance, has hailed the increasingly common occurrence of chain breaks as a ‘great opportunity’ for their company and the wider lending industry.
The comment comes as MT Finance reveals that breaking chains in the residential property market accounted for 20% of all bridging loans they sold in Q1 2021, making it the most common reason for people taking short-term loans.
A chain is created when multiple property purchases become reliant on one another: the successful sale of one property is directly linked to the successful sale of one or more other properties. If one sale falls through, it has a domino effect down the chain, potentially causing many other sales to fall through, too.
In today’s rampant housing market where demand for homes is higher than it has ever been, chain breaks are increasingly common and this is causing more people to require bridging loans to avoid losing out on their desired new home.
It’s most common that a buyer needs to sell their current home in order to fund the purchase of their new home. When the buyer for their current home backs out of the purchase, it means they don’t have the funds to finalise the purchase of their new home.
At this stage, they are left with two choices – either back out of the purchase because they can’t yet afford it, or take out a bridging loan to help them pay for the new home before their current home is sold.
It is the increasing number of buyers opting for the latter option which the lending industry considers a ‘great opportunity’.
Approach with caution
Impact Specialist Finance Director, Dale Jannels, is quoted as saying:
“I’m not surprised that chain break finance is top of the reasons to use bridging loans. Property transactions are booming and we’re seeing a large number of solicitors trying to exchange and complete on the same day.
“This inevitably will result in people pulling out of purchases late on and therefore clients need a short-term loan to fill the gap their buyer left behind. This brings a great opportunity to the sector, especially with the addition of the next stamp duty deadline looming on the horizon.”
From the consumer’s point of view, this quote essentially shows how the short-term lending industry is delighted that more and more chains are breaking, forcing more and more buyers to borrow extra money.
This apparent cynicism from the finance industry backs up what many industry insiders have been warning us about for months: all of the government intervention in the housing market over the past year (stamp duty holiday, 95% mortgages, etc), which we’re told was intended to help more people access the housing market, has actually made things much worse for the general public while making things much better and more profitable for banks, lenders, and the government itself.
For sellers, too, the booming market is good news – demand is driving house prices to all-time highs, so sellers are likely to get premium value for their homes. Buyers, on the other hand, are facing an increasingly daunting task, especially first-time buyers who don’t have the capital of an existing home to help them compete on the market.
Because of this, we’re seeing buyers abandon the historically pricey UK markets like London and the South East to take advantage of more affordable markets elsewhere, most notably in and around the Northern Powerhouse. By selling a small home in London, buyers are able to purchase much bigger homes in Yorkshire, for example.
This frantic market is set to continue through the summer and beyond. The big lenders are excited by the prospect of more and more buyers needing additional, unexpected loans.
So, while we’re not saying this is a bad time to buy a new home (you should not be put off by potential risks because there are ALWAYS potential risks) we definitely advise that preparation and awareness are vital because, while many obstacles have been removed by government intervention, there is still potential for things to take an unexpected turn.
Plan your budget accordingly.