Numerous cuts in interest rates in response to signs of a slowing economy do not always augur well for the short-term property market. But with leading economists still forecasting a soft landing rather than a recession for the economy as a whole, the hope is that price growth will moderate, rather than reverse. If they are correct, this is good news for both property buyers and investors seeking a range of short-term investment opportunities.
For individuals and businesses looking for a home for some risk capital, given the poor performance of the stock market and low returns from even the best interest-bearing deposit accounts, other opportunities abound, including the chance to ‘turn’ a property by buying, developing, and then selling it on within a short time frame of around, for example, six months.
These deals will appeal to more sophisticated clients such as professional property dealers and developers. Brokers can help such clients achieve this by raising capital on their existing property, thereby helping them to capitalise on current market buoyancy ‘ without necessarily getting locked into longer-term commitments such as buy to let.
Analysts believe the substantial increases in the average homeowner’s equity mean that a 95% loan-to-value mortgage of two years ago could easily have fallen to around 75% LTV in recent months. So the LTV risks for borrowers and lenders have fallen dramatically.
That attitude has enabled some lenders to be more flexible ‘ so long as the buoyancy continues and as technology enables lenders to cut their costs, improve their productivity and deal more efficiently with demand for their products.
Consequently, more self-certification and all-status mortgages and remortgages for any capital raising purpose are now on offer, a trend that has grown particularly in the last six months.
Lenders are sometimes, in the case of a home owner with 50% LTV, requiring little more than a credit check and a statement from the borrower that they can service an increased mortgage, before increasing the mortgage to perhaps 70% or even 80% LTV.
So long as proper lending criteria are followed, this increased flexibility clearly helps brokers to write more business and offer a more efficient service to customers.
Observers believe investors need to feel they are able to generate at least a 25% return from turning a property in a six-monthly period to make it worthwhile. To achieve this goal, two lending routes into this short-term market are normally advocated. First, via buy-to-let mortgage products, and second, via the short-term specialist lender market.
Traditional lenders offer buy-to-let headline rates which appear to be significantly cheaper than deals offered by specialists, but the lenders offering these deals can be slow and inefficient in processing applications and coming up with the money. Furthermore, not all lenders are willing to provide loans for a term of less than one year.
Short-term specialist lenders come into their own when the borrower is unwilling or unable to provide proof of income to the required standard specified by a traditional high-street lender or when the speed of the loan is of the essence.
Short-term lenders are also more likely to take on commercial investments involving shops and premises rather than just a second residential property. And because the loans are on a non-status basis, self-certification applicants and applicants with adverse-credit histories are far more readily considered.
It is unlikely, for residential home owners, that the spare equity in their home would be enough to finance a second property outright for cash. This implies that an investor in this scenario would have to pay an increased mortgage on the principal home and a mortgage on the second property.
However, they may not have sufficient provable income to satisfy the criteria of major lenders’ normal market products, including the much wider range of buy-to-let deals available. The investor in this scenario may, however, have substantial savings, or the prospect of a much higher salary in the future, still making the loans serviceable. Short-term lenders can take a different view because they make loans on a non-status basis, so long as sufficient equity is available in the investment property to underpin the loan.
Securing a deal
Clearly good investment opportunities can be hard to find and buyers need to be able to move fast to secure a good deal. This can be particularly important when buying at auction, with deposits payable on the fall of the hammer and the balance typically payable 28 days later. Speed will also be of utmost importance if the client is in a sealed bid situation, or in a geographical hotspot where competition is likely to be substantial. Then there are the situations when finance arranged with another lender falls through for whatever reason.
Many standard lenders simply cannot move fast enough in these circumstances and many IFAs ‘ as well as other mortgage advisers, including brokers, solicitors, accountants and estate agents ‘ are instinctively wary of recommending short-term lenders, except when other sources of finance have been exhausted, due to the higher charges involved. But as a fast means of raising capital, particularly for investing in second properties on a non-owner occupied basis, they are more relaxed about recommending such players, particularly when speed is of the essence.
Numerous finance companies lend to this market on a fast, non-status basis. Some property brokers, investors and dealers also use short-term lenders for property purchases when finance from a prime high street mortgage company has fallen through, with perhaps just days to go before completion.
But independent property agents, often also acting as finance brokers in the residential and commercial sector, are more bullish about the short guys ‘ agreeing with us that the speed of finance is often just as important as its cost, particularly in a highly competitive market.
Stewart Herman, principal director of Stewart Herman & Co, an estate agency based in London, says: ‘Many investors often find themselves in competition with other potential purchasers, facing a race against time to identify, raise finance for and redevelop the property they are after. They are also keen to exploit favourable market conditions that may exist at the time.
‘So in these circumstances, the financing of property redevelopment is all about speed, service and value. Investors need to be able to raise enough finance as a proportion of the purchase price of the target property for the deal in question. They also need to raise the money quickly to avoid losing the transaction and obtain that finance at a price which is both competitive and realistic when set against the likely gain realised from selling the property on at a later date.
Hermans adds: ‘Traditional mortgages are long-term financing vehicles and not appropriate for these types of transactions and, in our experience, short-term financing or bridging loans are typically more appropriate.
‘Furthermore, these types of short-term loans might appear to be readily available from many of the high street banks at competitive lending rates. But many of these deals are useless because banks are either unwilling to lend at realistic loan to value levels, or do not have the skilled lending staff to handle these types of deals in an efficient, effective and realistic manner. Such lenders are typically too slow in making offers and completing the financing arrangements.’
Buying to develop and sell on provides opportunity to capitalise on current market buoyancy without making a long term commitment.
Finance usually needs to be raised quickly and to prevent transactions falling through, speed of service is key.
A short-term lender should have necessary underwriting expertise to lend to non-status borrowers.