The ongoing issue of “empty nesters” occupying dwellings larger than necessary has again sparked attention. This centres on the rift between elderly citizens who seem disinclined to vacate their residences and younger families seeking available homes. An ESRI report recently projected that approximately a million residences in the nation are “underused” having more rooms than necessary.
Aside from emotional connections to the family residence and its local community, there’s a simpler explanation why many don’t opt for smaller accommodations when their children move out. A defined, safe financial strategy to downsize is not forthcoming. Undoubtedly, there’s often a shortage of smaller homes or flats in the neighbourhood, though even when present, selling your existing property and purchasing a new one is complicated in the current property market.
Here’s where the notion of bridging loans, primary to those who recall the period leading up to the financial meltdown, comes into play. These short-term loans, issued by banks, ordinarily served to facilitate the financial gap between purchasing a new home and selling the old one. For instance, bidding at an auction, common during the Celtic Tiger era, demanded upfront deposit payment and deal conclusion within a predetermined timeframe, frequently necessitating short-term finance before drawing down a mortgage. The interest rates were marginally above standard mortgage rates, but since the loan was short-termed, borrowers were typically able to handle it.
The financial meltdown ultimately caused the demise of bridging loans. However, estate agents and brokers reckon that reviving such facilities could help reactivate the second-hand property market, which is currently experiencing an unprecedented decline in available properties. In a recent publication, Sherry FitzGerald estate agents reported only 11,050 second-hand properties listed for sale in January, comprising a mere 0.6% of the totality of private housing in Ireland. This decrease impacts rural and regional Ireland more severely. A ratio of 3-4%, at least, would be typical in a functioning market.
The reinstatement of bridging loans could serve as a means of assisting those wishing to downgrade their current property status, a majority of whom are hesitant to sell their residence without having a new one lined up. In the current market where ready money reigns supreme, usually, these individuals lack the necessary funds to make an offer on a new home, all the while dealing with sellers who aren’t compelled to enter into traditional property sale agreements that rely on their property selling before they buy. After all, there’s no shortage of possible purchasers, either with cash or mortgage approval.
Michelle Kealy, a sector director at estate agency Lisney Sotheby, suggests that people in their twilight years naturally avert significant financial risks. With the scarcity and hefty cost of rental properties, she notes that opting to sell one’s house and renting while looking for a new home to purchase could be a challenging and costly endeavour.
The option for bridging finance, typically secured against a property for which the mortgage is settled, could offer a viable solution, but this is no longer available. Kealy also mentions this limit, which similarly affects younger buyers wishing to upgrade their homes but have their equity locked into their current residence and lack the financial means to acquire a new one, at least not without assuming considerable risk.
Mortgage broker Michael Dowling reports regular queries regarding bridging finances, chiefly from those intending to downgrade, but major lenders typically don’t cater to this service. In his perspective, there is a clear market demand, and the product’s non-availability is now a substantial hurdle for those wishing to downgrade.
Smaller lenders, including some from the UK, do promote bridging finance, but it is customarily available only for investors or commercial property transactions, and exclusively conducted through companies. These parties usually avoid the residential market, as per one source, due to the fear of the potential fallout if a snag occurs and they have to attempt to claim their collateral on a family residence, which is historically a lengthy and challenging process in Ireland, fraught with the risk of receiving negative press.
A product offering lifetime loans is now an option in Ireland, enabling homeowners to unlock the accrued equity in their property, making it an appropriate choice if they wish, for instance, to provide their child with financial assistance towards a house purchase or renovation, or to liberate funds for personal expenses.
Addressing the topic of bridging loans, Paschal Donohoe, who served as the finance minister back in 2019, informed the Dáil that the decision to provide such a loan scheme was the responsibility of the banks and should not fall to the Central Bank or the Department of Finance. He also highlighted the emergence of new regulations, including those set by the EU, that govern credit provision. The thorough creditworthiness assessments and stringent finance checks that mortgage lenders are required to conduct on applicants appear to be a primary reason why these major banks no longer extend this service. Banks have acknowledged the challenges they face in implementing the security they have on family homes in Ireland, based on past experiences in times of financial crisis.
Introducing a bridging loan scheme will not instantly solve the issues faced by the second-hand property market. While this move may release larger family homes to interested purchasers, it could intensify competitive bidding on smaller properties, which potential downsizers may find appealing. The ongoing scarcity of new compact homes and apartments, in accordance with findings from the ESRI report, continues to be a significant concern, and downsizers generally prefer residing within the same vicinity of their social circle. Furnishing more alternatives for homeowners forms part of the broader solution.
However, when the second-hand property market appears to be in a deadlock, new strategies become essential. Bridging loans featured prominently in the period leading up to the financial crash, with banks decreasing interest rates on these loan products in the early 2000s to attract long-term clients and relaxed their lending terms. Nonetheless, when interest rates began to surge in 2006 and the property market’s growth slowed, banks began tightening their lending criteria and bridging loans became pricier. As a result, banks were hesitant to offer bridging loans unless the seller already had a confirmed contract in place to sell their property.
In the wake of the crash, loan provisions all but vanished as demand for mortgages plummeted and numerous borrowers faced negative equity. Any hint of risk became taboo, and indeed, depending on their terms, bridging loans do pose a threat should property prices take a downturn or anticipated sales fail to close.
Presently, there is an argument in favour of resurrecting the bridging loan. However, the aim is not to stimulate demand or prop up prices, but rather to lubricate the gears of the stagnant second-hand market. Banks and alternative lenders could issue such loans while still retaining robust security, by enforcing stringent loan-to-value ratios for borrowers with considerable wealth ensnared in their properties. Given the robust demand for family residences, it is likely that most will be sold swiftly in today’s market, thus enabling the efficient clearance of any bridging loans.
In turn, this could usher more family homes into the second-hand market. Of course, a number of homeowners without dependents may opt to remain just where they are. Yet, the crucial factor is that such a move creates opportunities for those considering downsizing.