And the next lot is a cheaper mortgage

Online auctions are the latest way to get a loan, but do they offer the best deals?
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Auctions are a popular way of purchasing a home, enabling buyers to get a property for a knock-down price. Yet when it comes to financing the purchase, we find ourselves at the mercy of mortgage lenders with a set range of products and little room for bargaining.

Auctions are a popular way of purchasing a home, enabling buyers to get a property for a knock-down price. Yet when it comes to financing the purchase, we find ourselves at the mercy of mortgage lenders with a set range of products and little room for bargaining.

However, online mortgage auctions - which are already well-established in the United States - are coming over here., the one-stop online shop for financial products, last week launched a mortgage auction site. Home buyers submit their requirements to a panel, who then bid for their business; there is no fee and the offers that result should be market- leaders, it is claimed, as well as tailored to customers' individual needs.

"We think the mortgage market is moving towards risk-based lending where a product is designed for a particular customer," says Simon Nixon, chief executive of Moneysupermarket. "By launching an auction site we are trying to pre-empt this and push it forward. Not only will this create a level playing field for smaller lenders, it will also benefit the consumer because of the added competition it creates."

When applying for a mortgage by auction you must provide more details than are usually required in loan applications, owing to the greater risk involved in tailoring mortgage products to individuals. You need to give your bank account details, national insurance number and credit history. A panel of 14 lenders - including Bristol & West, First Active, Leeds & Holbeck, Newcastle Building Society and Woolwich - will bid for your business, with the best quotes returned to you, via e-mail, within 48 hours.

"As a concept, this is a great idea and will make life much easier for the consumer," says Robert Hollinshead, chief executive at Newcastle Building Society. "The success of mortgage auctions in the US and market development here in the UK suggests that this is the way things are moving and we wanted to be there and be part of it. Once people become accustomed to the idea, I think they'll be more inclined to visit an auction site than opt for a standard product because they'll get something different and better."

It sounds good but there have been glitches because of the popularity of the service. Moneysupermarket has had to extend the response time for a quote to be returned to 60 hours. "We have been overwhelmed by the number of applications," says Mr Nixon. "While we are confident that bids will be returned within 48 hours, we've emailed people to warn them that it might take longer just as a precaution."

The site also has a number of limitations. Customers must borrow at least £150,000. There are plans to reduce this to £100,000 and eventually £50,000. The panel of lenders is also restricted, although a further five are set to join within the next month.

"This sounds like a novel idea but there are only 14 lenders, some of which are quite small," says Siobhan Hotten, marketing manager at mortgage broker John Charcol. "It seems likely that their rates will be beaten by some of the bigger players in the market.

"We have looked at this idea as a concept and rejected it because we think we can offer better value. We have exclusive deals that are designed to be market-leading. It is going to be very difficult for Moneysupermarket to beat all the exclusives available on broker sites and the high-street offers, which change daily."

Ms Hotten is sceptical about how individual the products will be. "I can't see lenders in that volume being able to cater for individual needs," she says. "Margins are so small anyway that most mortgage providers won't be able to cut rates much further. My guess is that a lot of people will get a product that is more or less standard and is available to anyone."

This view is shared by online mortgage broker Netmortgage. "We've looked at the concept of a mortgage auction but decided to hold on because lenders aren't ready," says Charlie Ackworth, strategy director at Netmortgage. "This idea appears attractive for consumers but in practice lenders aren't prepared to provide bespoke mortgages unless they are large loans, so the auction won't do many customers any good."

Moneysupermarket disagrees. While it can't guarantee that every customer will get the best deal, it is confident the majority will. The members of the panel all want to generate business and they intend to do this with market-beating deals. If they aren't competitive, they won't get the business.

"This provides us with another channel through which we can satisfy the customer's needs," says Linda Davies-Carr, head of mortgages at Bristol & West, one of the panel members. "Customers will get a better deal and I am convinced that they will use the auction as a tool to see the best on the market. There are bound to be savings built into the product as the lender will do its utmost to ensure that the product is different. We can change and tweak products quickly which is why we are able to tailor a mortgage to the individual."

How competitive are the bids in practice? The first bid returned was lower than anything else on the market. The customer requested a £267,000 loan, capped for two or three years, with no redemption penalties. The best bid was a rate of 5.69 per cent, capped for two years. Moneysupermarket would not reveal who the lender is for confidentiality reasons, but the borrower would be informed of its identity.

Given the same criteria, the best bid John Charcol could come up with was a loan from the Chesham Building Society, capped at 5.75 per cent for two years. However, there are redemption penalties with this loan should you remortgage within two years. If you insisted on no redemption penalties, John Charcol could offer a loan from Leeds & Holbeck, capped until October 2003, at a less competitive 6.29 per cent.

Even though the auction offered the best deal, Ms Hotten advises against capped loans in the current economic climate. She suggests a fixed rate. For example, HMSL offers a two-year fix at 5.49 per cent with no redemption penalties.

As Moneysupermarket is execution-only, you need to be sure what type of product you want. If in doubt, you would be better-off approaching a broker or independent financial adviser.

Even though lenders and brokers are likely to launch their own online mortgage auctions, it remains to be seen how successful this format will be. Only a tiny proportion of mortgage transactions - between 2 per cent and 3 per cent - are currently conducted online.

"People will be watching this very carefully," says Matthew Ward, marketing manager at online broker E-Loan. "This is a compelling offering, which is competitive and pro-consumer. Anyone in the industry who has the consumers' interests at heart will welcome this move. However, people are still brand-sensitive, and I'd have thought Moneysupermarket would need a few big names on there to add credibility."

Halifax, the UK's biggest mortgage lender, is one of the site's notable absentees. "We regularly get approaches for ideas such as this and the auction site is not something we want to be on at this stage," says Celia Rowland, spokeswoman for the Halifax. "We've already got a strong brand but we are aware that the market is moving so we can't rule it out in the future. It will depend on which way the market goes."


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