How Will Higher Interest Rates Affect The Auction Finance Market?

After a series of recent rises, some forecasts are now suggesting the bank rate will reach around 6% in 2023.

While this directly affects the property market by way of residential mortgage rates, it also affects other types of borrowing such as auction finance.

Here, we will look particularly at how higher interest rates are likely to affect the auction finance market…

How Property Auction Finance Works (In a Nutshell)

Property auction funding is, of course, a different type of finance from a standard residential mortgage.

It tends to be short-term finance in the form of bridging or development finance. Investors and developers fund their purchase with a short-term loan before redeeming it on completion and sale or perhaps refinancing onto a longer-term loan.

Bridging finance was historically a very expensive form of finance which, to some extent, narrowed its appeal to borrowers together with the scope for lenders.

However, historic low-interest rates in recent years have made it more viable and have grown the market considerably. Short-term interest rates have dropped as low as 0.4% pm of late compared to around 1.5%+ pm a decade ago.

In the residential mortgage sector, it has become standard practice for buyers to take fixed-rate mortgages, sometimes of up to five years.

The Difference Between Short-Term Auction Bridging and Longer Term Mortgages…

While current market conditions are seeing these types of deals evaporate as we speak, this has never been the case with so-called ‘flash’ finance which uses a short-term rate.

This has several important implications for auction finance customers: Rising interest rates impact the short-term finance market immediately.

However, lenders do not need to ‘bake in’ long-term interest rate rises and can afford to remain competitive in the short term.

…But Be Cautious if You’re Looking to Refinance a Bridged Auction Purchase

Auction finance borrowers who plan to refinance onto long-term finance must be mindful of what the rate will be then.

This could potentially affect the type of projects they look for at auction, i.e. short terms ‘flips’ could be preferred over longer-term buy-to-let. Borrowers are also likely to examine their other project costs more carefully, as well as be more considered in their bids.

Interest rate rises are not the only story in the news this week of course…

Recent proposed tax cuts by way of the Stamp Duty reduction and Income Tax and Corporation Tax changes could offset the rising cost of finance in some small way.

Lastly, it is perhaps important to remember that not all auction buyers are reliant on finance.

Traditionally, auctions were always the haunt of the cash rich investor. As interest rates tighten it could be the case that this type of buyer will predominate at the auctions once again.

Now, to take in some thoughts from auction finance experts…

Scott Hendry, Director of Auction Relationships at Together, tells us how the auction finance market is faring at the moment, and offers his thoughts on how interest rate rises might affect it.

He says: “As is normal, we are just coming out of a slow period. August is generally a quieter month for auction but we should soon see this pick up heading towards December.”

“The recent announcements and rising interest rates will of course have a huge impact on the market, with some lenders now temporarily pausing new lending of their fixed rate products.”

“So far, we have not yet seen a dip from our normal volume of funding. However, it cannot be ignored that this will likely change in the future considering the current climate.”

“However, the vast majority of funding with auction properties are bridging loans, which will probably still continue strong as they are not as dependent on rates as personal finance mortgages.”

“Of course, historically customers use auctions to find better property deals, which may mean they are more attractive in the current climate. However, it is worth noting that in recent years, some auction properties have become more mainstream, prices have increased and so deals may not be as lucrative as they have been in the past. However, they are still one of the best ways to grab a property at a good price.”

“The recent tax relief we have seen from the mini-budget will definitely have a positive impact on the auction market. Landlords have for many years endured many hits from the government, so finally seeing this new incentive of tax relief for them is excellent.”

He also offers some tips on how those looking for competitive auction finance should proceed:

“With regards to getting the best deals, it is crucial to do due diligence when researching lenders and the properties themselves. At Together, we have found success with lucrative, safe lending.”

“We are able to finance our customers with incredible speed – something which is of course essential for auction properties for which mainstream lenders may take too long to fund. We pride ourselves on having a proven track record and excellent relationships with our customers, and are actually one of the only lenders to have a dedicated auction team.”

Adam McGhee, Director and Head of Specialist Advice at DNA Financial Solutions, also offers his thoughts on the auction finance market at the moment.

He says: “This is still an extremely strong sector. Lenders have increased rates, particularly ones that use institutional funding lines as they track the base rate on pricing so it means the margins for these types of lenders have tightened and rates have increased by 0.1-0.15% pcm.”

“Interestingly enough with banks, as they use their own deposit funding they have increased slightly but are still very strong in the space as their margins aren’t as impacted with base rate movements.”

As to how the market might change in the future he says: “In terms of difficulty, nothing has changed to not make auction finance attainable as such. There will no doubt be more scrutiny on the exit strategy, particularly if clients are retaining properties as the lending has seen a sharp increase in the term debt space.”

“Flip projects will be assessed on viability and valuers’ comments regarding the GDV will be looked at more closely in terms of getting the finance. But ultimately lenders still want to lend in this space and they see growth in this sector in 2023 and beyond as clients move away from buying rental properties with rate increases, to get better returns on their cash investment.”

Adam McGhee offers some advice on how those looking for auction finance might best navigate the current market: “Getting the right advice from a finance specialist will be paramount to enable you to be advised on the best solution based on your individual circumstances and strategy. There are a lot of fantastic opportunities in the auction purchase space, and financing this allows you to look at more than one option.”

“We at DNA can advise on various strategies from light to heavy refurbishment and have a great deal of experience in helping clients realise the maximum profit in their projects.”

“It goes further than just getting you the best finance deal, it’s about helping you reach your property aspirations for 10 plus years because for us at DNA, it’s about the long-term relationship not the here and now.”