When you are looking to buy an auction property in the UK, you will need to decide how to finance the purchase. This can be done in a few different ways, and we will explain all of your options here.
First, let’s take a look at how the bidding process works and what you can expect from the time frame involved.
How the bidding process works
When you attend an auction, you will need to register as a bidder before the event begins. This can be done by providing some personal details and proof of ID, such as a passport or driving licence. You will then be given a bidding number which you will use to make your bids during the auction.
The auction will start with an opening bid from the auctioneer and the bidding will then open up to the room. As bids are made the price will rise and there will be bids from the room and also from online participants. If you are the highest bidder when the auction ends, you will be legally bound to purchase the property for that price.
How is it different to purchasing a property the normal way?
One of the main differences between buying a property at auction and through the open market is the time frame involved. With an auction purchase, you will need to exchange contracts and pay a deposit on the day of the auction. The full amount will then need to be paid within 28 days.
If you are buying a property on the open market, you will usually have a few weeks or even months to complete the purchase. This is a lot more flexible and can give you more time to arrange your finances and to get a mortgage in place if needed.
The auction deposit
The auction process is very much a structured legal one and it is why so many sellers choose this route when they need to sell.
Once you have made the winning bid, you will be required to pay an immediate deposit of ten percent of the purchase price. This deposit is paid on the day of the auction and the balance is then due within 28 days.
At this point you will have agreed to purchase the property with contracts also exchanged the same day. The buyer is committed to the purchase and the seller is committed to the sale.
If you are not able to pay the full amount within the agreed time frame, you will lose your deposit and the property will be put back up for auction.
It is important to remember that the auction or exchange deposit is different to the mortgage deposit.
On auction day you will pay 10% of the purchase price but if you are borrowing for the purchase then you likely need at least another 15% as a cash mortgage deposit. Most bridging lenders will only go to 75% loan to value.
How to finance auction property
There’s really only two ways to pay for a property. By using cash that you have in the bank or by borrowing the money. It’s important to remember that you need cash for the deposit, the auction fees, stamp duty and of course your own legal fees.
Buying for cash
If you have the cash to buy a property outright, then this is obviously the easiest way to finance an auction purchase.
You will need to make sure that you have enough money in your account to cover the deposit and any other associated costs on the day of the auction. It’s also worth having a buffer of around five percent of the purchase price to cover any unexpected costs.
Then the balance needs to be paid within 28 days, when completion takes place.
Your solicitor will require proof of where the cash is held (bank etc) and where it originated from.
Borrowing money to buy at auction
If you don’t have the cash to buy a property outright, you will need to look into borrowing the money. You can borrow against the auction property itself or one that you already own.
Owned property – You could remortgage your current property, or an investment property, to release equity from it to raise the funds needed. This could allow you to obtain a more competitive interest rate but time needs to be allowed for the remortgage process to take place.
If remortgaging is not an option then you could look towards a short term, second charge bridging loan. These are a bit more expensive but are quick to arrange and used frequently for auction purchases
Auction property – You could take out a mortgage on the auction property itself, although this can be more difficult to arrange and you will need to have a mortgage survey carried out beforehand. More popular is having property auction finance arranged as a bridging loan, ready for the purchase transaction.
Bridging lenders are more prepared to work to tight time frames and are used to the auction process. These loans are incredibly flexible and they can be used for many different reasons.
Other associated costs
There are a few other associated costs that need to be considered when financing an auction property purchase in the UK.
These include:
- The buyer’s premium – This is a fee charged by the auctioneer and based on the final purchase price.
- Stamp duty – This is a government tax that needs to be paid on all property purchases over a certain purchase price.
- Legal fees – You will need to instruct a solicitor or conveyancer to carry out all the legal work associated with buying a property.
Can I secure a mortgage before the auction?
If you wish to pay for the property with a mortgage then you need to be very organised in the weeks running up to auction day.
Your mortgage broker will need to arrange an agreement in principle with a lender that they believe can work to the auction timescale. Equally an experienced solicitor will be needed who can work just as fast.
You effectively then need to have been approved for a mortgage, with a valuation having taken place, prior to the auction day. The risk here is that you may not be the highest bidder on the day or the property may have been withdrawn.
Taking the mortgage route will require the property to be in good condition and habitable.
Why buy at an auction?
Purchasing a property at auction can be a quick and straightforward way to buy a property. It can also be a great way to get a bargain, as properties are often sold at below market value.
However, it’s important to remember that you are buying the property ‘as is’ and there could be hidden problems that you are not aware of. It’s essential that you carry out your own due diligence before bidding on a property and only bid what you are comfortable with.
What properties can you buy?
Most types of properties can be bought through an auction, although some are more common than others.
You will find that a lot of commercial property is put up for auction, as well as vacant land and development opportunities. You will also find residential property being sold at auction but many of these are often classed as unmortgageable.
This means that they are in such a poor state of repair that most standard mortgage lenders will not lend against them. This type of property is often only suitable for cash buyers or those with access to alternative finance such as an auction bridging loan.
Bridging finance will allow you to buy a property in any condition. Once fully renovated you can then sell the property and settle the finance or remortgage over to a long term mortgage.
Improve your chances of getting auction finance
There are a few things that you can do to improve your chances of getting auction finance.
Firstly, make sure that you have a realistic budget in place and only bid on properties that fall within this. It’s essential to have your 10% cash deposit ready to go as auctioneers will require this on the day of the sale.
If you are planning on taking out a mortgage, make sure that you have a mortgage offer secured before the auction.
Finally, it’s always worth speaking to a specialist broker who can help guide you through the process and put you in touch with the right lender for your needs.
Using an auction finance broker
There are over 100 specialist property lenders, each with their own rates and lending terms. This can make it very difficult for you to identify the best deal for your needs.
This is where an auction finance broker can help. An experienced broker will have access to a wide range of lenders and will be able to quickly identify the most suitable loan for your individual circumstances.
They will also be able to negotiate with the lender on your behalf and, in many cases, secure you a better rate than if you went direct.
If you are planning on bidding on an auction property then please give us a call on 020 8301 7930 to speak with an auction finance expert. We are able to arrange mortgages, remortgages and short term bridging loans.
Completely independent of all lenders, we can give you the maximum possible choice.
- About the Author
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Norman has been in the financial services industry since 1987. For the first 10 to 15 years this was quite broad in scope including inheritance tax, residential mortgages and pensions, but this gradually changed such that since 2005 he has specialised in property finance.
