Navigating the Financial Maze of Downsizing in Retirement: What are Bridging Loans?

Jan 29, 2024

Retirement often marks a period of transition, a time to embrace new experiences and simplify life. Many retirees consider downsizing their homes, seeking a smaller, more manageable living space that aligns with their changing needs and lifestyle. However, the financial aspect of downsizing can be logistically difficult to achieve, especially when coordinating the sale of your existing home with the purchase of a new one. This is where bridging loans can come into play.

A bridging loan is a short-term loan secured against the property, your current property, or both. It provides you with the financial flexibility to purchase a new home before your current one has sold. This can be particularly advantageous for retirees who have found their dream retirement home but cannot afford to wait for their current property to sell.
 

What are the benefits of using a bridging loan for downsizing:

  • Flexibility and Speed: Bridging loans allow you to move on your own timeline, without the pressure of a tight chain of transactions that rely on other buyers and sellers. You can secure your new home and move in, while your current property finds a buyer at a suitable price.
  • Stronger Purchasing Position: Acting almost as if you were a cash buyer with a bridging loan can strengthen your position in the property market. You can make competitive offers and move quickly, increasing your chances of securing your desired retirement home.
  • Stress Reduction: Downsizing can be challenging emotionally and financially. Bridging loans can alleviate the stress of coordinating timelines and provide a sense of security during the transition.

What do we need to consider before using a bridging loan:

  • Cost: Bridging loans are far more expensive than mortgages. Rates are typically anywhere between 0.5% to 1.5% per month. As the interest is added to the loan, this also compounds, meaning further interest. Lenders charge arrangement fees too, which are typically 2% of the amount borrowed.
  • The Exit: Bridging loans are typically short-term loans, often lasting up to 12 months. It’s crucial to have a clear plan for selling your existing property, refinancing to a mortgage, or selling other assets within this timeframe to ensure the debt is fully cleared. Whilst no one can predict the future or guarantee you will be able to exit a bridge, never, ever enter into a bridging loan without the exit being as assessed as much as you reasonable can, beforehand.
  • Repossession: Bridging lenders assess your ability to repay the loan, on the equity in the property and how comfortably they can get their money back if they have to repossess you. Once the bridging term (e.g. 12 months) has finished they can and often will start repossession procedures against you, so you need to be prepared for this risk. Some lenders will grant a 6 month extension, but you must bear in mind that this is a short term arrangement, hence the name ‘bridge’.
  • Impartial advice: Our advice is always to seek advice from a mortgage broker, rather than a bridging specialist in the first instance. There could be other ways to achieve the desired outcome, without the risk or expense of a bridging loan. A bridging loan should always be a ‘needs must’ product rather than a ‘plan a’.

Additional tips for downsizing in retirement:

  • Start researching potential retirement homes early and consider your lifestyle preferences, accessibility needs, and budget.
  • Declutter and organize your belongings before moving to minimize the stress of packing and unpacking. Consider donating or selling items you no longer need.
  • Involve family and friends in the downsizing process, and don’t hesitate to seek professional help if needed.
  • Downsizing in retirement can be a rewarding experience, allowing you to embrace a simpler, more manageable lifestyle. Bridging loans can provide the financial flexibility and peace of mind you need to make this transition smoothly. Carefully consider your financial situation, seek professional guidance, and make informed decisions to ensure a successful downsizing journey in retirement.
  • Get advice. Bridging loans can be fantastic tools to achieve a purchase, which simply wouldn’t have been possible without one. However, there may well be simpler, safer and cheaper ways to buy your dream home, without the risk and expense of a bridging loan.Get in contact with us or book an initial consultation to see how we can help you secure a mortgage.

Steven Morris – Advising Director

CeMAP CeRER

 

Steve loves a complex mortgage. Most recently he has used his technical geekery to work his way up through Which? Mortgage Advisers, progressing to Senior Adviser and then Onboarding Manager. There, he was responsible for hiring, training and managing new advisers.

He also ran the monthly new starter inductions and wrote and maintained the telephony advice standards of the company. Outside of work Steve can be found coaching and being run ragged by his local under 10’s rugby team, Bristol Harlequins RFC.

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