As auctions grow how can mortgage providers help accelerate growth? – Thompson and Moss

These three factors are seeing more clients consider the auctions market. Once seen as an avenue for quick disposal of properties, it is now a fruitful stomping ground for buyers and investors not only as a place to buy quickly and if sales can pick up in this area, then it could accelerate the whole property market. But where there is opportunity there needs to be finance, so how can mortgage brokers support in this area? 

Auctions are having their moment 

For a number of years, property sales at auction have been steady. However, the spike in interest rates at the tail end of 2022 delivered a boost to attendances, either virtual or physical, and sales. 

Mapping data from Essential Information Group (EIG) against the Bank of England (BoE) base rate demonstrates that sales at auction did not just increase alongside the increase in the base rate. Importantly, these sales appear to have maintained their volume as the base rate fell. 

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Now that investors and buyers have noticed the speed, stability and security that auctions deliver, it is clear that this interest is here to stay. But to help this trend continue, there needs to be clarity in the financial path for individuals and landlords, because the structure of auctions does not allow for a standard mortgage package. 

Ready for bidding  

Buying property at auction requires financial preparation that goes beyond simply having a deposit available. The completion timescales are shorter than in private treaty sales, and the commitment made on auction day is legally binding from the moment the hammer falls. 

Usually, buyers would have weeks or months to arrange a mortgage after an offer is accepted. The speed and security of sale in auctions do not allow for this. 

Contracts are exchanged immediately, and the deposit is paid on the day. The balance – remaining 90% of the purchase price – is due within a fixed completion window, typically 28 days for unconditional auctions. 

That compressed timescale means finance needs to be agreed in principle, if not fully confirmed, before a buyer enters the auction. Lenders who aren’t familiar with auction timescales can struggle to move quickly enough, which is why specialist auction finance products exist and why preparation matters so much. 

Knowing the lending solutions available  

Bridging loans are short-term secured loans designed specifically for situations where speed is essential. They can typically be arranged within days rather than weeks. This means they are well-suited to auction purchases. A bridging loan is usually secured against the property being purchased, and sometimes against additional assets, and is repaid once a longer-term mortgage is arranged or the property is sold. 

We often see property investors, who have experience in renovating properties, choose this option. They can be repaid quickly and, as such, interest rates are usually higher than standard mortgages, so a clear exit strategy is needed by the buyer. 

Standard residential and buy-to-let mortgages can be used for auction purchases, but the timescale is the critical factor. Most mortgage offers take several weeks to process, and lenders will require a property valuation before issuing a formal offer. 

The usual 28-day completion window for an unconditional auction purchase makes the process that comes with a standard mortgage difficult. Not all lenders will be willing or able to move at the speed required, so there are a number of lenders providing auction-specific packages. 

Having auctions and mortgages arms to BTG helps us see the big picture in this respect and for a long time BTG has had a partnership with Together Money. However, there are more entering the market that understand the need to agree terms before the hammer falls, and they have due diligence and interest rates to reflect that. 

The auction market is continuing to grow across the sales areas of residential, commercial and mixed use. Yet, there remains potential for more. Landlords have long understood the potential in auctions, but the data suggests that residential buyers are also entering the market in search of ways to step on or step up the property market.  

If these buyers can get the right financial help, then there could be acceleration in auctions, which can help to accelerate the property market as a whole.