Buying a property at an auction is simple and fast.
There’s no property chain, no gazumping, if you are the highest bidder then you get the property.
Once the auctioneer’s hammer falls you have legally exchanged contracts and are committed to buying. You usually have up to 28 days after the auction date to complete the purchase of the property, although sometimes it can be 7 days.
What is auction finance?
Property auction bridging loans can be arranged quickly, for almost any type of property, and suits the tight timeframes that apply to auction property transactions.
It’s just not practical to rely on a conventional mortgage application to be ready when you need it. But bridging lenders are used to moving fast. When buying an auction property a successful bidder usually has to pay 10% of the purchase price on the day with exchange of contracts.
Full payment is then expected within 28 days, ample time for an auction bridging loan but too long for most mortgage lenders.
How does auction finance work?
Auction finance is offered on a short term, interest only basis.
All bridging loans are only for short periods, an auction bridging loan would typically be 3-12 months duration.
You make no capital repayments with an auction bridging loan. At the end of the agreed period you will repay the amount borrowed along with any accrued interest.
The 2 main benefits of auction finance is that it can be arranged really quickly and used to finance almost any type of property, whether it can be lived in or not.
Auction finance is used to provide a short term ‘mortgage’ loan so that the property can be purchased. Lenders are normally happy to go up to 75% of the value so you will need to separately fund a 25% deposit. If you have additional properties then ask us about a 100% bridging loan.
The auction bridging loan can be arranged quickly which comfortably allows you to complete the purchase within the 28 day period.
Interest can normally be rolled up each month and added to the loan, leaving you with greater cash flow to complete the project.
The auction loan will then be repaid by selling the property or by refinancing over to a longer term mortgage such as a buy to let.
What types of property can you buy?
Auction finance will allow you to buy almost any type of property.
- House of Multiple Occupation (HMO)
- Multi Unit Freehold Blocks (MUFB)
- Buy to lets
- Holiday lets
The properties don’t even need to be habitable!
Pretty much any residential, commercial, semi-commercial or mixed-use property can be bought with auction finance. Bridging lenders are specialists and will consider many properties that a regular high street lender refuses as unmortgageable, including non-standard construction and ones requiring major refurbishment works.
One area that is particularly popular with investors is purchasing a leasehold property where the lease term is low. Most standard lenders are not interested but a short lease bridging loan will allow the purchase to be financed.
In fact bridging loans are so flexible they can be used in many different ways. Here are 11 reasons for using a bridging loan.
How to apply for the best deal
Applications for auction finance are generally assessed on a case by case basis, although there are some set criteria that you must meet.
When you have selected a property you intend bidding for its a good idea to approach a broker to help you apply for an agreement in principle. This will let you know if you qualify for the loan and helps to confirm the costs and rates available. Bad credit bridging loans are available but to be successful your application will need to have a strong exit strategy. You can then attend the auction house on the day with some confidence that finance will be approved.
As an experienced auction finance broker we can help you get the relevant paperwork in order so that your application is successful.
This will include:
- Details of the property or land
- Auction sales particulars
- Proof of deposit
- Your exit strategy
Whatever timeframe you need to work to our brokers are there to make it happen for you.
Features of auction bridging loans
Bridging lenders are used to setting up auction bridging loans quickly, it’s what they do. So if you obtain an Agreement in Principle prior to the auction and you are successful, then the application can quickly be approved. With an auction purchase you normally need to complete within 28 days, this is ample time for a bridging lender.
Auction bridging loans are considered case by case so a degree of flexibility is possible if your proposition is strong. Loan terms can be from 3 months up to 12 months. You can repay the loan at any point during the term.
PROOF OF INCOME
Unlike mainstream mortgage lenders, auction finance lenders are not generally interested in your income, or whether you can prove it. The strength in the application lies with the property and your exit strategy. So even if you have experienced bad credit, you can still obtain the finance you need.
As with all types of loans a bridging lender will want to charge you interest on the amount borrowed, it’s how they generate their income. But you should be able to agree that these payments are ‘rolled up’. This means that each month the interest is added to the original loan. This costs slightly more than if you made the payments but massively helps your cashflow situation.
Bridging lenders will grant loans on almost any type of property, both commercial and residential. They are also happy to lend on properties that cannot be lived in or those that are of non-standard construction, or both!
Most high street mortgage lenders would not be interested in any of these options.
Property investors can therefore purchase uninhabitable properties that require conversion or refurbishment using auction finance.
Read more on unmortgageable properties.
Auction loan criteria
Most types will be accepted including: individuals, limited companies, partnerships, trusts and special purpose vehicles (SPV).
A first charge over the property being purchased will be needed.
Having a good credit profile will improve the options available to you. However, bridging lenders look more towards the asset, so even if you have bad credit, finance will be available. Bad credit should only spoil your chances if the lender feels that it will adversely affect the exit strategy.
The property can be in almost any condition and the lender will offer a loan against the current value.
How much can you borrow?
Most bridging lenders will fund up to 75% LTV of the property value, some go to 80%.
But there is a way to fund 100% of an auction property purchase price.
The bridging lender will be happy to lend 100% of the cost if this can be secured over 2 properties you own. So perhaps 75% on the new purchase and 25% on a property you already have built up some equity in.
This is a good example of how second charge bridging loans can help, even when an existing mortgage is in place.
The exit strategy
The exit strategy is a key part of your auction finance application.
The lender needs to be satisfied with your plans for repaying the loan once the term has ended. Bridging loans are assessed on the strength of the exit strategy.
If the exit strategy is to sell the property then the lender will be looking for evidence of an improved value and a sellable property. A buy to sell mortgage would be suitable for this.
Should you intend to refinance the bridging loan, as you wish to hold the property, then the lender may request an agreement in principle (AIP/DIP) at application stage. Any bad credit may affect your ability to obtain this remortgage and this then weakens your exit strategy.
Alternatively if you intend to add the property to your investment portfolio then a bridge to let mortgage might be useful. This combines a bridging loan (for the purchase) with a long term buy to let mortgage (for the exit).
Read more on bridge to let mortgages.
Occasionally the best laid plans go off course. While your intention may have been to sell the property, what happens if the market turns and you can’t sell? It would seem prudent to refinance the bridge and move to a longer term mortgage such as a buy to let. But if this is within 6 months of initial purchase you will be caught by the 6 month mortgage rule.
Why use a bridging loan broker?
WE CAN SAVE YOU MONEY
Each auction finance application is looked at separately. Our job as your broker is to secure the funds you need at the lowest cost and we can do that by negotiating with the bridging lenders on your behalf.
WE CAN SAVE YOU TIME
Our bridging brokers, along with their support team, are there to make sure your application goes as smoothly as possible. Dealing with lenders and valuers can take a lot of time out of your day. We do it everyday, saving our clients time and stress.
WE CAN GIVE YOU CHOICE
There are so many choices when it comes to auction finance and bridging loans with changes happening each day. We are independent brokers, free to search the entire market to find the deal that best suits you. We work for you and not the lender.
When you are ready please give us a call on 020 8301 7930.
AUCTION FINANCE CHECKLIST
- Contact us prior to the auction with your finance requirements
- View the property with a builder or surveyor to assess the condition and price up any works required
- Do your sums. Is it a profitable and viable project?
- Obtain the legal pack which contains copies of the deeds and searches etc
- Ask your conveyancer to carry out any additional searches
- Avoid bidding unless an Agreement in Principle has been arranged
- On auction day you need funds to pay the deposit and the auctioneer fees
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