Despite fears that banks have been clamping down on lending, auction buyers arguably have more options than ever for financing their purchases.
A raft of new short-term lenders has sprung up as the economy – and demand for this type of finance – has grown. At the same time, lenders have been slashing rates and fees, and offering loan-to-values of up to 100%.
In theory, this means more buyers are able to get developments off the ground or buy properties quickly, possibly before looking for a cheaper long-term loan. But is this reflected in the auction room?
“There is no doubt that this greater access to funding and growth in product availability is fuelling the auction sector,” says Ian Tudor, head of commercial auctions at CP Bigwood.
Tudor says auction houses are benefiting from the growth in specialist auction finance providers, and points to figures that show the number of buy-to-let mortgages has more than doubled in the past two years, reaching a total of 1,011 different products.
Auction Finance director Scott Hendry agrees that the market is now more competitive. “Over the past 12 months in particular, the number of lenders going under the banner of auction finance has increased incredibly,” he says.
Hendry suggests the change could be down to the sector becoming more “mainstream”, drawing a wider range of buyers with more diverse finance needs, and encouraging lenders to fill a perceived gap in the market.
Others put it down to high-street banks restricting their lending criteria, although there is a lack of consensus over this. Tom Branson, director of Charterbank Capital, says he still takes many calls from potential bidders wanting to scope out the likelihood of being able to get a short-term loan, in case their bank decides at the last minute not to honour a draft deal.
But this, in itself, is a change, says Branson, as “even two to three years ago they’d have expected to have to come to us first [rather than a conventional bank]”. This suggests traditional banks may be opening their doors again, he says.
The picture is mixed, although there are some signs that lending criteria are being loosened in certain circumstances despite the tougher rules imposed by the Mortgage Market Review, which came into effect last April.
According to Council of Mortgage Lenders data, home-mover lending in June saw substantial monthly increases and a slight yearly increase in volume and value.
Of course, even if banks are willing to lend to a buyer, the length of time taken to underwrite the mortgage may not lend itself to an auction purchase, in view of the fact that it typically takes 28 days between the gavel falling and completion. CML figures released last year showed it was taking more than 70 days for a typical house-mover to have their mortgage application processed.
By contrast, it took the average property buyer using a bridging loan 34 days to complete in the first quarter of 2015, according to Bridging Trends, which found that lending of this type increased by £18.6m in Q2 2015, to £99.1m.
Another advantage of going to a specialist auction finance provider, says Branson, is that it is generally offered on a non-status basis, which means there is far less scrutiny of borrowers’ income and outgoings. Of more relevance is the level of profit and whether the purchase is seen to be a good deal.
Whatever the pros and cons of the various options, the financial choices available to many auction-goers are undeniably more varied than before. Among the flurry of newer auction finance providers coming onto the scene is Auction Finance 4 Brokers, which at the time of writing was offering a 70% loan-to-value and 0.75% interest on a three-month bridging loan, with no exit fees.
Institutions that have traditionally been known for longer-term loans have expanded their offerings to auction-buyers. For example, Shawbrook Bank has created a dedicated short-term loans team and reduced its rates for auction finance, and Aldermore Bank began offering bridging loans last June.
“It is certainly a contrast from the dark days of the recession, when funding for property purchases, particularly auction-type stock, was almost impossible to secure, even for good-quality, well-let investments,” says CP Bigwood’s Tudor.
Stuart Buchanan, head of Acuitus Finance, highlights the arrival of several new lenders in the residential and high-value investment sector this year. His latest newsletter refers to a recent portfolio of prime London residential properties that achieved a loan-to-value of 60% with a new lender, compared with 35% with the client’s existing clearing bank. Prime residential investments can also now be financed by a specialist bank that removes all debt service covenants and will lend up to 65% loan-to-value.
There are now more than 250 commercial investment lenders operating in the UK, most of which have relatively small teams, which means they concentrate on larger loans, the newsletter notes. “If you are looking to finance a property or portfolio from £10m to £100m, there may be much more attractive options than the regular bank terms,” it states.
Interest-only deals in this sector have returned, normally at a 50% loan-to-value, unless the security is very strong, in which case 60% is possible.
Branson says that at present, bidders have high expectations of securing an affordable loan. He adds: “It is likely that consumer confidence is higher now than it ever has been, with bidders being perhaps more optimistic about being successful in obtaining finance post-auction.”
Branson does not expect the increased competition to lead to a rates war, and says his bank will maintain its focus on a smaller number of high-quality markets, and on prioritising customer service. Matching the rates of the latest offerings is “not sustainable” for most established auction finance providers, he adds.
Conversely, Hendry concedes that Auction Finance has reduced its rates because of reduced interest rates and the growth of rival lenders: “We look at our competitors, and their products have become a little keener in terms of rates.”
Is there a downside to this trend? Branson says the upturn in confidence about securing finance is resulting in less due diligence prior to bidding. He also urges caution about some of the headline rates, saying: “As with anything, the devil is in the detail. Low headline rates are one thing, but be aware of all the fees and charges before signing up. We always encourage customers to consider the overall cost for comparison.”
Mortgages
• 61,000 mortgages were taken out in June – a 22% monthly increase
• Remortgages were up by 30% on May and 31% compared with 2014
• In the second quarter of 2015, loan-to-values increased to 73.6%, from 72.9% in Q1 2015 and 72.5% in Q2 2014
Source: Council of Mortgage Lenders June report, published 11 Aug 2015
