Over the years we have been approached by numerous clients to facilitate funding for a whole array of different scenarios. One particular scenario which is perhaps not as prevalent as it has been in years gone by is that of purchasing property at auction. This is obviously a scenario where timing and speed are of the essence and very often it is short-term finance which is required. This is not an issue but the vast majority of bridging loan/short term lenders will also require an exit route and refinancing arrangement within 12 months. Thankfully, we have access to more than 300 different lenders across the market taking in an array of niche areas.
This particular case study involved the purchase of a property at auction costing circa £300,000. The client already had a significant amount of cash but required additional short-term funding to complete the purchase. As we work our way through this case study, you will realise that if one link in the chain fails this can have a significant impact on the timescale. The fact that the buyer has already committed to the purchase also adds a certain degree of urgency.
This scenario involved a UK national living in the UK looking to extend their buy to let portfolio. We have covered auction purchases in some of our earlier articles because there is a defined process and various pros and cons. Properties which require no additional work before being re-marketed as private rents tend to attract the most interest. When bidding on such properties there is a temptation to extend your bidding range while trying to maintain one eye on the long-term potential. This is obviously a balancing process, one which needs to be at the forefront of your mind so that you don’t get carried away with your bids!
So, this particular case study involved a property, three flats on one title, which was eventually acquired at £300,000 via the auction process. The client was able to put down cash of £140,000 against the purchase price leaving a funding gap of £160,000. This is relatively straightforward so far. The client was looking for an achievable LTV ratio, had in place a surveyor to look at the property after which an application for short-term finance would be made. So far so good………..
The basic scenario was as follows:-
Client: UK national
Property auction purchase price: £300,000
Cash payment: £140,000
Funding gap: £160,000
Proposed LTV ratio: 53.3%
Estimated rental income: £19,000 per annum
Estimated gross rental yield: 6.3%
In this particular scenario it soon became apparent that timing would be of the essence especially when the buyer was let down by their surveyor. The reality is that no property purchase, especially a property auction purchase, will ever go smoothly and completely to plan. It is how you address these issues as and when they arise which dictates the overall cost of finance and whether indeed the transaction is able to go ahead. So, how did we address the break in the chain?
One of the major benefits of having in excess of 300 lenders to approach is the fact we can also make use of their contacts as well as our own. Over the years we have dealt with many different surveyors and where applicable, as in this situation, very often they will accommodate short-term property surveys. As the client had already committed themselves to the purchase of the auction property this was an integral part of the overall chain. We would obviously need to complete this process in order to move on to the issue of short-term financing. Thankfully, such is our reputation in the market that we have numerous contacts we can call upon when looking to secure short-term finance very quickly.
If we take a step back and look at the situation from a distance, the process was fairly straightforward but there were issues to address:-
Funding requirement: £160,000
LTV ratio: 53.3%
Type of finance: Short-term
Exit/refinancing route: To be confirmed
When looking to secure urgent short-term finance some parties may be tempted to accept the first offer on the table. In some cases this can be seen as a way to reduce pressure and at least clarify the cost of the short-term finance. However, the term “more haste less speed” is one which springs to mind. When negotiating such scenarios it is imperative that we remain focused, inject a degree of competition into the process and use our trusted contacts.
As speed is obviously of the essence, it is also very important to know what potential lenders require, how they want it presented and the degree of competition they can offer on rates and terms. We cannot afford to waste time approaching a lender who is not suitable for the situation or perhaps not as competitive as others. This is where our years of experience in the mortgage funding market are priceless. We have numerous long-term relationships with many different lenders and other parties also involved in the property purchase chain.
In the majority of cases where short-term funding is required as a degree of urgency, we tend to find that private banks are more flexible and fast-moving. This was the case with this particular scenario as we approached a number of private banks whom we have dealt with numerous times in the past. Therefore, we already knew the information they required, how they wanted it presented and the level of funding and terms they were likely to offer. These are often lenders who work on an invitation only basis and are not always available to the wider mortgage broking community.
So, we needed to secure short-term finance in a significantly reduced timeframe while maintaining competitive rates/terms. There was also the issue of the surveyor and the fact that another party would need to be involved in the process. Thankfully, this did not prove to be a problem as once we discussed the scenario with our funding partners they were able to create a bespoke arrangement for us. The details of the solution we negotiated were as follows:-
Client: UK national
Property auction price: £300,000
Cash payment: £140,000
Funding requirement: £160,000
LTV ratio: 53.3%
Additional services: Surveyor
Funding secured: £160,000
Interest charge: 0.58% per month
Term: 12 months
Exit/refinancing options: In place
In this particular scenario the LTV ratio was not particularly challenging, the total funding was relatively modest and a significant portion of the purchase price would be paid in cash. The main challenge was the urgency of funding with the timetable disrupted by problems with the surveyor. These are the type of scenarios we come across on a regular basis, part of the purchase chain failing which therefore places pressure on the buyer. Our pool of contacts has grown enormously over the years and does not just take in lenders. There is also our experience which allows us to maintain a cool head during what can be high-pressure times. It is safe to say that the client was delighted to raise the finance in a very short space of time and on extremely competitive terms.
When looking to secure finance for clients we prefer to take a broader look at the scenario as opposed to focusing on particular elements in the early days. It would have been easy for another mortgage broker to focus on securing a surveyor while perhaps taking their eye off the ball with regards to competitive financing terms. Our ability to see each part of the purchase process as a jigsaw piece allows us to follow the process while continuing to appreciate the wider picture. Before we even applied for short-term finance to cover the funding gap we were well aware of what our lending partners required in terms of information. This therefore ensured that no time was wasted approaching parties who were not entirely suitable for the scenario.
There are very few, if any, property purchase/sale scenarios in which we have not become involved since the company’s inception. Ensuring a speedy conclusion to funding, which was required in this case study, while maintaining a degree of control is also important. If you ever find yourself in a similar situation we would welcome the opportunity to talk through your requirements in more detail. We have many years of experience in creating bespoke funding solutions which are shaped around a client’s unique scenario as opposed to a “one size fits all approach”. Where applicable we can offer a number of different solutions based upon real-time market rates. This allows you to compare and contrast not only cash flow but also short, medium and long-term financial liabilities. Yes, we are conscious of the need to maximise funding but this must be done within a strict framework so as not to overstretch finances and cash flow. There is a lot to consider!
We are delighted to present the Global High Net Worth Mortgage Guide which takes an in-depth look at the world of international mortgage finance in luxury property markets around the world. The guide covers local regulations, access to funding, how to secure the most competitive terms and much more.
Our bespoke approach to mortgage funding is second to none, covering residential, commercial, development and international property acquisitions. Real-life case studies highlight how we approach complex funding requirements which often demand a bespoke funding structure.DOWNLOAD PDF