Alternative Property Funding

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Daniel Tannenbaum

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Millions of people throughout the UK and the world use traditional mortgages to purchase properties or release equity for investment purposes. Traditional mortgages around the world follow a well-established process and structure whereby a sizable loan is taken out, secured upon a property owned by the borrower. The lender adds interest to this, making up the total mortgage amount. Mortgages can stretch over a number of decades to facilitate manageable repayments for borrowers.

There are however, other property finance options which tend to be for specific purposes. This includes auction finance, self-build, bridging and development finance products . These, and the others that exist are designed for specific needs and requirements of suitable projects (source: https://www.spfloans.co.uk/).

One of the major advantages of these property finance offerings is that because they are designed for specific purposes, such as for purchasing a property at auction or building a property oneself, the lenders and brokers in the market tend to better understand the products as well as the needs and requirements of borrowers in relation to the wider market.

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This not only makes the process easier and more manageable, but provides prospective borrowers access to a wide range of exclusive products from specialist lenders across the relevant areas. A major advantage though of specific products in the property market is that specific, otherwise challenging cases that perhaps may have previously been declined are often accepted where relevant to a specific product available.

Auction Finance

Auction finance provides a fit for purpose solution for buyers at auction. Buying properties in this way is as nerve-wracking as it is exciting. There are many exclusive properties available on the UK property auction market, with numerous properties being exclusive to auction altogether. This means that not do bidders have the opportunity to bag a bargain, but they after have access to exclusive properties not available elsewhere.

Auction finance though allows borrowers the money needed to purchase otherwise inaccessible properties. Most prospective buyers at auction do not necessarily have the purchase amount for the property immediately available as it tends to be hundreds of thousands, sometimes even millions of Pounds. Therefore, much in the same way that a mortgage is sought to cover a large cost, auction finance must be obtained for the purchase to become a reality.

The Auction Process

Prior to the actual auction, the auction house will provide interested parties and prospective buyers with information about the properties to be offered. This gives all interested parties enough time to set up viewings and get the property valued properly to make an accurate assessment of what they wish to bid at auction if at all. Prospective buyers will usually check the property over with a surveyor, an experienced valuation expert and they will check the paperwork and technicalities with a specialist solicitor.

Once happy with the property and their maximum bid confirmed, the prospective buyer will go to the auction to bid on the property in question. There, once they have their bid accepted as the winning bid, they will need 10% of the property’s value immediately available to pay the auction house. This is known as a ‘holding deposit.’ With auction properties, as soon as the gavel falls on the winning bid, the buyer has entered into a legally binding contract under UK property law.

Furthermore, from this point, the winning bidder must also complete the property purchase within 28 days. Therefore, having all of the necessary arrangements in place for finance is crucial to be completed before the actual auction. There are also additional fees that will need to be accounted for such as vendor’s fees, surveyor’s fees and legal fees.

Important to note though is that lenders will typically only lend up to around 70% of the property’s value, known as the Loan-to-Value (LTV). Therefore, in addition to the 10% that must be immediately available, the buyer will need to account for the remaining 20% too, which can be many thousands of Pounds.

Self-Build Finance

Self-build finance is a truly unique type of property finance, providing the funding needed to build one’s own property. self-build properties are usually the borrower’s primary place of residence and abode and as such, this type of finance is treated as a Regulated Mortgage Contract (as a traditional mortgage is.) This means that it is subject to much lower interest rates and designed for those seeking to build a property to live in as opposed to a buy-to-let or investment property which would incur additional interest, charges and taxes.

A further benefit of self-build finance is that the loan amount is released in stages rather than in a single lump sum as most other loans and property finance are. This provides a number of distinct benefits:

  • The loan is more manageable as only precisely what is needed is provided at each stage, alleviating the financial management-related pressures from the borrower
  • There is lower risk to the lender as less money is lent in each batch. This translates into a lower overall loan amount, as the lender is less likely to lose out with a loan provided in this way
  • The loan amount, used correctly will account for additional costs and fees such as legal fees and subsequent building testing

Self-build properties also tend to fetch around 20% more than equivalent properties on the market. This is of huge benefit to the borrower of the loan as it makes their property a sound investment as well as a perfect home.

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