Could bridging help to beat the stamp duty holiday deadline?
By Helen Crane -
For people in the market for a new home, one of the few upsides of the pandemic is that they won’t have to pay any stamp duty if their property purchase is worth less than £500,000.
The move, which chancellor Rishi Sunak said would “catalyse the housing market and boost confidence,” could save buyers up to £15,000 and applies to any sale taking place between 8 July 2020 and 31 March 2021.
The average property deal takes around 12 weeks to complete, so buyers should be looking at making an offer by the end of December at the latest if they want to take advantage of the exemption.
But meeting this deadline may prove challenging. There was a rush of sales earlier in the year as we emerged from the first lockdown, and the industry has since struggled to keep up.
According to analysis by property search platform Zoopla, there are 50% more homes in the sale process than there were this time last year.
In late October, it estimated that there were 418,000 sales in the pipeline that were yet to complete, worth a total of £112bn.
Now we are entering a second lockdown, there are questions over how well the industry would be able to cope with another rush after these measures are lifted. Chances are it will slow down everything from getting a viewing to getting legals and finances in order.
“I think any deadline by definition will create a last minute rush for whatever it is, but this one in particular will create a lot of furore as the potential savings are thousands of pounds,” says Luke Egan, head of specialist finance at Pure Property Finance.
There have even been calls for the discount to be extended. Last week Jeremy Raj, the head of residential property at law firm Irwin Mitchell said that hundreds of thousands of would-be buyers would miss the deadline unless it was pushed back.
“The housing market rollercoaster has clearly got plenty more twists and turns left to unfold,” he said. “We’ve gone from the most brutal and sudden shutdown that most of us can recall, to unprecedented levels of activity over the summer, and significant backlogs in many parts of the industry.
“Lenders, surveyors, solicitors, managing agents and search providers are all struggling to keep up.”
But the government have given no signs of an extension happening so far. So with buyers desperate to complete on their new homes before 31 March, could bridging be poised to step in and save the day?
Brokers say they have already witnessed an increase in interest and enquiries about bridging in the past few months, even if it has not translated into a spike in deals just yet.
“We’ve definitely seen more people asking about bridging,” says Ashley Thomas, director at brokerage Magni Finance. “At the minute, it’s probably not so important to them, but just after Christmas I think there will be a big rush.
He estimates that enquiries about bridging finance at his brokerage have increased by about 30%, and interestingly many are coming from “people who wouldn’t have thought of it before”.
Brokers say that the sweet spot, where the amount buyers need to repay on the bridging loan could be materially less than the saved stamp duty, is on homes that cost between £350,000 to £500,000 – though of course it depends on the term of the bridge.
Tracey Scott, head of mortgage advisory at contractor-specialist broker Super Contractors, says she already witnessed a “mini-boom” in bridging loans in Q3. This, she says, has been helped by the fact that some city-dwellers were desperate to get into a house in the country before another lockdown.
“Many people are desperate to move to larger homes with gardens, after being stuck in a small property and working from home during lockdown, as some fear another lockdown or are facing the prospect of working from home on a permanent basis,” she says, adding that she expects this demand to come back with a bang in Q1 2021.
The stamp duty exemption is open to landlords and investors, although they do still have to pay the standard 3% surcharge for people purchasing a second home.
Egan even predicts that sellers might start insisting on buyers with cash or a bridging loan, to ensure that they themselves do not miss out on the stamp duty exemption on their onward purchase.
“It won’t be just the case of the buyer getting a bridging loan to increase the speed of their purchase,” he says. “Some sellers may insist on cash buyer or people with bridging loans rather than mortgages, as they want to benefit from the discount on an onward purchase.”
If there really is such a sharp increase in demand, could we see lenders having to become more competitive with their rates in order to bag more of this new business?
“We haven’t seen anyone saying, let’s undercut the market yet,” says Terry McCarthy, director at My Ideal Mortgage. “But as we get closer to the deadline, I could see someone really jumping out of the market and saying ‘we want to be the primary place to go for this.”
There is also the question of whether the industry is prepared for a potential last-minute run on bridging loans, when the market is already so backed-up.
“We have a number of lenders who have made significant changes to service enquiries and loans due to the pandemic itself, enabling them to carry on when some competitors have been closed temporarily,” says Egan. “They will be very well placed to deal with another influx of enquiries because of what this has taught them.”
And given that bridging loans are usually arranged much more quickly than traditional mortgage finance anyway, you would hope that lenders could rise to the challenge.
”Bridging lenders are experts in processing applications under extreme time constraints,” says Scott. “This type of finance will help more traditional homebuyers than ever to ensure chains are not broken, completions can take place on schedule and that robust plans are in place to exit this type of financial arrangement as soon as possible after the property has been secured.”
These unique circumstances mean that the type of people applying for bridging loans may not be property finance experts, but rather, regular home buyers who just need to speed up the process. So will there be an element of advice and education needed on the part of mortgage advisors?
Thomas says it is worth first-time bridging applicants going through a broker so they can make sure they get a good deal.
“At the minute, rates are anywhere between about 0.45% and 2% a month,” he says. “So even if you end up on 1% you could be paying double what you need to. That’s where it’s worth seeing a broker.”
McCarthy says that buyers who aren’t experienced in bridging need to think carefully about the term of the bridging loan that they take out.
‘Rather than the price you’re paying for the house, it’s really about the term of the bridge,” he says. “If your property is between £350,000 and £500,000, you don’t want to be paying back the loan for any longer than about three months.”
All in all, this situation could end up being a good PR exercise for the bridging industry. If these new bridging converts have a good experience, perhaps they will tell their friends and the whole idea of a short-term loan will seem a little less daunting.
Some believe that process is already under way. “It’s a bit more mainstream, more people know about it, and rates have come down a bit,’ Thomas says. “It’s still an expensive option, but it’s not as much as it used to be.”
Whatever happens in the long term, one thing is for certain: bridging lenders and brokers had better strap in for a busy few months.
Helen Crane is a freelance journalist specialising in property and personal finance. She previously worked at London daily newspaper City A.M and on the trade publication, Property Week.