How A Bridging Loan Can Help You Downsize Your Home In Retirement
How A Bridging Loan Can Help You Downsize Your Home In Retirement
Find out how a bridging loan can help you to downsize. Get in touch now and get the best deal with ABC Finance.
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Author: Gary Hemming CeMAP CeRGI CSP
20+ years experience in bridging loans
Retirement Downsize Bridging loans Explained
What is a bridging loan?
A bridging loan is a short term loan that is secured against property, or multiple properties. When you downsize your property, your bridging loan would usually be secured against both your current property and the one you are buying.
When describing bridging as a short term loan, it’s more precise to say that bridging loans against your own home are called regulated bridging loans. This refers to the fact that they are regulated by the Financial Conduct Authority (FCA), which gives you greater consumer protection than is offered by unregulated bridging loans.
A huge benefit of regulated bridging finance is that there are no monthly payments to make, the interest is added to the loan, which helps reduce living costs.
How can I use bridging finance to help me downsize?
If you’re looking to purchase a new property before selling your existing one, a bridging loan can be taken out against one or both properties. This will release the funds needed to complete your new purchase, and if needed, cover stamp duty and moving costs.
Once purchased, you are able to move into the new house, and while looking to sell your existing one.
A retirement bridging loan offers the benefit of speed. When buying niche properties, such as bungalows, over 55’s housing or park homes, the market moves extremely quickly, and without finance, or cash in place, opportunities can be lost.
Bridging finance also allows you to compete with cash buyers when the need arises. Adding to this, when purchasing as a cash buyer, vendors are often open to reducing the sale price for the convenience, in some cases, offsetting the costs of the bridging loan.
What are retirement downsizing bridging loans used for?
The main reasons we see clients use this type of finance are:
- Chain break, i.e. buying a new property before selling yours.
- Refurbishment, you may want to refurbish or adapt the new property before moving in, whilst continuing to live in your current property.
- Moving abroad, we work with clients who wish to move abroad, but don’t want to wait until they sell their home.
- Repaying an existing mortgage or debts whilst your property sells.
How do I get the best deal?
To get the best deal, you should use a reputable fee-free broker. While we may be a reputable fee-free bridging loan broker, this isn’t just a case of bias from us.
The reason for the advice is that we can offer a unique view of the market, help you to find the best deal quickly and offer support throughout the application process.
A good broker works for you, not the lender, so can be a vital ally in working through the process and securing the best possible outcome.
What are the alternatives?
If you’re unsure about taking out a bridging loan there are some alternatives. They are:
- Equity release: Equity release allows you to borrow money against your property and roll up interest, much like a bridging loan. The key difference is the fact that equity release is a long term loan and can come with very high early repayment charges should you choose to pay it off.
- Retirement interest only mortgage (RIO): A RIO mortgage is an interest only mortgage secured against your home and designed for applicants aged 55+.
- A Mortgage: A mortgage could be used to fund the purchase, although you would need to meet the lenders criteria around income and maximum age, which could prove tricky if you’re retired.
- Wait for your property to sell: Waiting for your property to sell is obviously ideal as it will mean you don’t have to pay any interest or charges. That said, it isn’t always possible, especially if you need to move quickly to secure the perfect property.
Will I qualify?
Most pensioners can qualify for a bridging loan to downsize, as there tends to be sufficient equity in the properties to support the loan.
As the exit strategy tends to be the sale of the security property, little consideration is given to an applicant’s income, so even those on pension income alone can qualify.
That said, we always do thorough checks to ensure that the exit strategy is sensible and the loan can be repaid in full without issue. While we may go further than the average lender would, we do this from a position of looking to protect our clients rather than to exclude people from borrowing.
Read more – Bridging Loan To Buy A New Home Before Selling.
How much can I borrow?
Minimum and maximum loan sizes
We offer bridging loans for pensioners from £10,000, with no maximum loan size.
For more valuable properties, we even offer a range of large bridging loans with enhanced terms for loans over £1,000,000.
We also offer specialist bridging loans for care home fees.
Loan to value requirements
When using just one property as security for the loan, up to 75% loan to value (LTV) is available.
If securing the loan against 2 or more properties, such as your home and a new property, we’re able to offer 100% LTV. In this instance, you can borrow enough to purchase the new property and if your equity allows, you can even borrow more than the purchase price.
This is a huge advantage when you have cash tied up in your equity and needs funds for stamp duty, moving costs and fees.
Does income affect my maximum loan?
No, income doesn’t affect your maximum loan when selling a property to repay the loan.
If however you will refinance the loan as your bridging loan exit, the bridging loan lender may assess your income to ensure you can borrow enough to repay the loan.
All income types can be considered, including employed or self-employed income, pension income and rental income.
How do I repay the loan?
Typically in this situation, the loan is usually repaid through the sale of your existing property.
If there is a shortfall, equity release or a small mortgage may be required, although this is rare.
Other repayment options can include sale of other assets, inheritance or investments such as stocks and shares.
Retirement bridging loan lending criteria
What loan term can you offer?
FCA regulated bridging loans, i.e. loans secured against your home, carry a maximum term of 12 months.
Some non-regulated bridging loan lenders offer terms of up to 36 months, however 24 months is the maximum in a majority of cases. Non-regulated bridging finance only covers loans against investment, or commercial property.
What checks will the lender carry out during the application process?
The main checks that the lender will carry out are the reason for the loan, a valuation of the property that the loan is secured against and your credit history.
Will I qualify if I have bad credit?
Yes, credit history doesn’t necessarily impact your ability to obtain bridging finance, it may however impact the interest rate and the maximum loan to value available.
Some lenders offer specialist bad credit bridging loan products.
Retirement bridging loans for downsizing interest rates & costs
What interest rate will I pay?
When downsizing your home, interest rates start at 0.54% for applicants with a good credit rating.
If your credit history is less than perfect, interest rates often start at 0.7%.
Are there set up costs to consider?
Yes, there are set up costs to pay for taking out the loan, they include:
- Valuation fee. This is payable upfront, unless an automated valuation (AVM) can be carried out, there is usually no charge for this.
- Lender arrangement fee. This can be added to the loan and tends to be between 1-2% of the loan amount.
- Legal fee. There will be legal fees payable for setting up the loan, you are liable for both the lenders legal fee as well as your own. In some cases the lender will offer duel representation legals, whereby their solicitor acts for both of you. This is usually quicker and cheaper than dealing with 2 solicitors.
Do ABC Finance charge fees for arranging retirement bridging finance?
No, we don’t charge fees on loans of £100,000 or above.
How to get a downsizing bridging loan if you’re retired
What is the application process?
The application process is simple and can be broken down into 5 steps:
- Choose a lender and product, you can do this via a broker.
- Submit your application and supply your supporting documents.
- Your application will be assessed by a loan underwriter, if accepted the valuation will be instructed or the automated valuation (AVM) will be carried out.
- If the valuation is satisfactory, the loan offer will be issued and legals instructed.
- The solicitors will carry out their work and agree a completion date.
Should I work with a bridging finance broker or go to a lender direct?
It’s a good idea to work with a broker, especially if there is no broker fee. A good broker will know precisely which lenders to work with and will compare bridging loan interest rates for you.
ABC Finance Limited also assists with your loan application and interacts with the lender, valuer and solicitors for you.
We’re also available after loan the loan has completed, should you need us, to ensure your exit plan is on track. You can of course work with lenders yourself, however speaking with multiple lenders and comparing loan offers, including interest rates and fees can be time consuming.
What documents will I have to provide?
When taking out a bridging loan to help you downsize, both brokers and lenders will require the following documents:
- Application form including a loan summary and details of the loan repayment plan.
- Proof of photo identity (ID), i.e. Passport copy or driving licence.
- Proof of residency, i.e. a utility bill dated within the last 3 months.
- Last 3 months personal bank statements.
- Proof of income may be requested.
How long does the application process take to complete?
A retirement downsizing bridging loan application takes from 3 days to 4 weeks to complete.
The completion timeframe varies and depends on several factors, such as:
- Whether a physical valuation or an AVM is needed.
- The lenders application processing time, including their current workload.
- Whether both the lenders, and your solicitor has capacity to complete within a deadline.
- How quickly you are able to send the required forms and documents.
When you have found a property to purchase, you should also check with the vendor how quickly they can complete. They may be in a chain or waiting for finance themselves.
Frequently asked questions
Can I repay my loan early?
Yes, you can repay the loan early should you be in a position to.
Some lenders have minimum interest earnings periods, most are the first months interest, however some charge for the first 3 months.
Is there an age limit?
Most lenders have a maximum age limit of 85 years, however we do work with lenders who have no maximum age limit.
Why work with ABC Finance?
As a whole of market FCA regulated broker, we’re able to help you find the best bridging loan rate.
We’ll assess your circumstances and tailor a product to suit, and help deal with the lender, valuer and solicitors for you.
We can also liaise with the estate agent of your behalf.
Is this type of finance regulated in the UK?
Yes, when downsizing your home the loan is regulated by the FCA, much like a standard mortgage.
Are there any warning signs to look out for?
These loans, when secured against your own home should always be regulated. If a lender or broker encourages you to say that the property will be an investment property, or that you won’t live in it when you will, you should not proceed.
This is an attempt to make the loan unregulated by manipulating the reason for the loan. This will reduce your consumer protection and could cause problems further down the line should you run into any problems in repaying the loan.
How can I calculate my expected bridging loan costs?
We’ll happily calculate the total costs for you, however you can do this yourself.
A good example is if you borrow £250,000 at 0.54% per month, the interest is £1,350 per month.
The only things to add are the valuation fees or other fees that are not to be added to the loan.
To calculate costs, use our bridging loan calculator or speak with one of our bridging loan advisors.
