Thanks to online auctions you can now buy a home from the comfort of your sofa at below the market price. But how do you fund the purchase of a property which is most likely going to be an investment…? Steve Nobbs extols the virtues of the bridging loan
It’s clear that there is some economic difficulty ahead. The financial markets did not respond well to the government’s mini-Budget, which has resulted in staggering increases to typical mortgage rates.
For example, the typical rates on two-year fixed rates soared above 6%, having been nearer 4.5% just weeks prior to this point.
Outside the mortgage market, there are warning signs too. Data from the Office for National Statistics shows the nation’s economy shrank by 0.3% in August, with the Bank of England warning that we are likely to be in recession by the end of the year.
Between the jump in interest rates and the recession on the horizon, it is likely that the extraordinary house price growth that we have seen over the last couple of years will slow, or even for house prices to drop.
Taking advantage of opportunities
Should prices fall, however, this will create opportunities for property investors.
Even before these difficulties emerged, professional landlords, in particular, were keen to add to their portfolios. A study from Handelsbanken back in the summer found that around half of landlords with at least four properties planned to buy in the next 12 months.
If prices do indeed drop, that sort of portfolio expansion is only likely to become more appealing.
Going, going, gone…
One of the most attractive routes for securing a discount addition to a portfolio comes in the form of a property auction.
Property auctions have become much more common over the last few years. While your immediate image of this might conjure up a formal setting, with an auctioneer at a lectern as shown in Homes Under The Hammer, we now have online auctions being held. This means you could invest in a new property directly from your sofa.
The nature of property auctions makes them attractive to investors. You aren’t competing against other buyers in the same way as you might with a regular sale, while many of the properties on offer will be lacking in some way – perhaps they do not have a functioning bathroom or kitchen. Because of these issues, they may be obtainable for below market value.
Yet with a little TLC, an investor may be able to turn the right property into a desirable home, which they could then sell on or let out to a tenant.
It isn’t all down to pot luck on the day, either. The auction house will publish a catalogue of properties which it will be auctioning in advance, allowing buyers to check them out in person, to get a better feel for the property’s potential as well as what it may require to refurbish it.
How will you pay for it?
While auctions offer savvy investors the chance to purchase properties with potential at a bargain price, they do come with an additional challenge.
An initial deposit of 10% of the transaction price has to be paid on the day, with the remainder due to be paid within a month.
That’s fine if you happen to have the cash to hand to cover the deal, but plenty of ambitious investors are not in that position and so have to borrow the funds to complete the deal.
Yet that sort of timescale is beyond a traditional lender, where you may be waiting months for the money to be lent.
That’s where bridging loans can prove useful. A bridging loan is a form of short-term property finance, which typically runs for up to a year, with lenders priding themselves on how quickly they can provide the funds. In some cases it takes just a matter of days for that money to be delivered.
The idea is that the investor can use that money to complete the deal – and perhaps even cover the costs of some of the likely refurbishment work required – before refinancing onto a regular mortgage or selling the property on for a profit.
Finding the right bridging loan
Bridging loans are a specialist area of the mortgage market – they aren’t offered by lenders who you would consider household names, while many mortgage brokers will not advise on them at all.
However, recent years have seen competition grow within the bridging sector, meaning that investors can benefit from a wide range of options. Working with a broker that is experienced with bridging loans is therefore the best option if you are considering this type of finance.
Steve Nobbs is head of unregulated mortgage broking at The Loans Engine
