Bridging loans: would the return of this kind of finance help those who want to downsize to a smaller home?

The flaring up of the familiar debate on “empty nesters” living in houses which are too big for their needs focuses on the generational conflict between younger families looking for homes and older people seemingly unwilling to move out and free them up. A recent ESRI report estimated that a million houses in the State are “under-occupied”; in other words, they have more rooms than are needed.

But as well as an emotional attachment to a family home – and the area it is located in – there is a more prosaic reason why many don’t downsize after the kids have left. It is the lack of a clear, low-risk financial route to do so. There is, for sure, often a lack of options in terms of smaller houses or apartments in the same locality – but even when there is, selling your existing home and buying a new one is not straightforward in today’s market.

Step forward a concept known only to older readers who can remember back before the financial crash to the era of the bridging loan. This was a shorter-term loan extended by a bank, typically to bridge the period between paying for a new house and selling an old one. For example bidding at an auction, typical in the Celtic Tiger era, required the ability to pay a deposit up front and close the deal within a defined period, often requiring short-term finance before a mortgage could be drawn down. The interest rate was typically above the normal mortgage cost, but as the loan was for a short period the borrower was generally able to manage.

Bridging loans finally disappeared after the financial crash. But brokers and estate agents believe the return of such facilities could help free up the second-hand property market, where the number of available houses is at a historic low. A recent report from Sherry FitzGerald estate agents found just 11,050 second-hand properties were listed for sale in January this year, representing a mere 0.6 per cent of the entire private housing stock in Ireland, with rural and regional Ireland disproportionately affected. A rate of 3-4 per cent, at least, would be more normal in a functioning market.

Scope for budget tax cuts and cash for households is limited - this will be a difficult pre-election package to agree on

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Buyers of older homes may pay thousands more per year in mortgage repayments

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Bridging loans: would the return of this kind of finance help those who want to downsize to a smaller home?

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A key goal of the return of the bridging loan would be to help potential “downsizers”, many of whom are unwilling to take the risk of selling their own property when they don’t already have one to move to. And in today’s market where cash is king, they normally would not have the cash to bid on a new home and are facing vendors who simply do not have to bother getting into old-style “I’ll buy your house if I can sell mine” property chains. There are, after all, queues of potential buyers with cash, or mortgage approval.

In their 60s and 70s, people simply do not want to take big risks with their money, according to Michelle Kealy, divisional director with estate agent Lisney Sotheby‘s International Realty. And with rental properties scarce and very expensive, she points out that taking another route by selling their own home and trying to rent a place while searching for a new home to buy can be difficult and prohibitively expensive.

Bridging finance – secured on their existing home on which the mortgage is generally already repaid – could allow them to move on, but is not now available. And, according to Kealy, this is also limiting the ability of some younger buyers who want to buy a bigger home and have equity tied up in their existing property, but not the cash firepower to secure a new property, or not at least without taking a significant risk.

Mortgage broker Michael Dowling says he gets regular inquiries relating to bridging finances, particularly from potential downsizers, but that it is a product which the main lenders do not generally make available. In his view, there is a definite demand in the market and the lack of availability of this kind of finance is now a significant “stumbling block” to those wanting to trade down.

A number of smaller lenders – including some from the UK – do advertise bridging finance, but this is usually available only to investors, or on commercial property deals, and all done through companies. These players generally steer clear of the residential market for fear, according to one source, of the “Joe Duffy moment” when something goes wrong and they have to try to exercise their security on a family home, which is normally a long and arduous process in Ireland and one that risks bad publicity.

A lifetime loan product is available on the Irish market, allowing owners to release equity build-up in their home, though this is more suitable if, for example, they want to give cash to a child to help them to buy or do up their own home, or release funds to support their spending needs.

[ I split my house with my daughter, without government help. Stop shaming ‘empty nesters’ ]

In terms of bridging finance, then minister for finance Paschal Donohoe told the Dáil in 2019 that whether or not to offer this type of loan was a matter for the banks themselves, rather than the Central Bank or the Department of Finance. He did also point to new rules, some from the EU, which now regulate the provision of credit. The post-crash regulations and capital requirements appear to be one reason why banks do not currently offer bridging loans to personal borrowers. Banks also fear that such lending could be risky, for example if the home sale falls through. Banks also realise that when something goes wrong, the experience after the crash shows that exercising the security they hold on a family home is difficult in Ireland, increasing the risks associated with this kind of finance. And contrary to what brokers and estate agents say, they also say they have not yet noticed significant demand for the return of the bridging product.

The availability of bridging loans would not be a magic bullet to free up the second-hand market. It would, for example, be likely to free up bigger family homes for potential buyers, but could increase the bidding pressure on smaller ones, where the downsizers would enter the fray more readily. Lack of supply of new smaller homes and apartments, as pointed to by the ESRI report, remains a fundamental factor and downsizers quite reasonably will typically want to stay in the same area, close to friends and social contacts. Providing more options is part of any longer-term fix.

But in a situation where the second-hand market is effectively “stuck”, new approaches are needed. Bridging loans became part of the pre-financial crash frenzy, with competition rising in the early 2000s as banks cut interest rates on their bridging products in an attempt to tie in more longer term business and loosened lending conditions. As interest rates rose through 2006 and the property market started to slow, availability started to tighten and bridging became more expensive. Banks started to get nervous and were loath to extend bridging loans unless the seller had a contract signed to dispose of their own property.

And, post-crash, provision of the loans more or less disappeared as mortgage demand slumped and negative equity hit many borrowers. Anything smelling of risk was a no-no and, depending on how it is structured, bridging loans do carry risks if property prices start falling or expected sales fall through.

Now there is a case to revive the bridging loan, not to boost demand and hold up prices but to try to free-up activity in the second-hand market which is clearly dysfunctional. By restricting loan-to-value ratios, banks or other financiers could extend such finance while still having significant security from borrowers with considerable wealth tied up in their homes. The strong demand for family homes suggests that in today’s market most will sell quickly allowing any bridging to be paid down.

In turn, this would lead to more family homes coming onto the second-hand market. Many empty-nesters may still decide to stay right where they are. But the point is opening up possibilities for those who want to downsize.