Financing a property purchase at auction can be tricky. There are many things to consider, and it’s important to be prepared before the bidding process begins. In this article, we will outline how to finance an auction property purchase in the UK.
So if you’re thinking of buying property at auction, read on for advice on how to get your finances in order!
When it comes to financing an auction property purchase, there are a few things to keep in mind. First and foremost, you’ll need to have the funds available for the deposit. In most cases, the deposit is 10% of the property’s purchase price and is payable on the same day. So if you’re bidding on a £200,000 property, you’ll need to have £20,000 available for the deposit, plus the auctioneers fees.
Generally speaking, regular mortgages tend not to work well at property auctions simply because they take so long to organise. But if you’re planning to finance your purchase with a mortgage, you’ll need to make sure that the lender is happy to lend you the money in time for the auction. This can be difficult to arrange, so it’s worth speaking to a mortgage broker in advance.
The funding is usually arranged through auction finance specialists, and it is essentially a bridging loan developed specifically for those wishing to buy property at auction.
What is auction finance?
Auction finance is a specific type of bridging loan that is used by those looking to buy property at auction. It is a short-term loan that is repaid within 12-24 months, and it is generally used to finance the purchase of a property that needs some repair or refurbishment work.
One of the key things to remember with property auction finance is that you will need to have the money to repay the loan within a very short space of time. This is why it is so important to make sure that you are in a strong financial position before you even think about bidding for a property at auction.
If you are thinking about using auction finance to purchase a property, it is worth getting in touch with a specialist bridging finance broker who can help to arrange the loan for you. They will be able to assess your financial situation and make sure that you are eligible for a loan, as well as helping to find the best deal possible.
Preparing for Your Auction Property Purchase
If you are planning on bidding for a property at auction, it is important to do your research in advance. Make sure you know exactly how much the property is worth and what fees are associated with the purchase.
It is also worth getting a valuation from a professional surveyor so that you have an accurate idea of how much the property is worth. This will help you to avoid overpaying.
You should also make sure that you have a solicitor lined up who is experienced in dealing with auction sales. They will be able to advise you on the legal process and help to ensure that everything runs smoothly.
Mortgage in Principle
You could try and secure a mortgage in principle to finance your auction property.
This is basically a decision from a mortgage lender in writing that says they are willing to lend you a certain amount of money, based on their assessment of your financial situation.
However, it is worth noting that getting a mortgage in principle does not guarantee that you will actually be approved for the full amount when it comes to applying for a mortgage.
Getting a mortgage in principle does not mean that you have to take out a mortgage with that particular lender. It simply means that they are willing to lend you the money, based on their assessment of your financial situation.
If you feel like you need some support choosing the right kind of finance, we are here to help. We can put you in touch with a qualified broker who understands bridging loans.
How Does Auction Finance Work?
Auction finance is a short-term loan that you can obtain very quickly, usually within 14 days (provided you can meet the right criteria).
To secure this type of bridging loan, you will usually need to be able to pay a deposit of at least 25 percent, and you will have to provide your lender with a clear exit strategy (this is how you plan to repay the loan). To learn more about exit strategies read our article What are some common exit strategies for bridging loans?
Evidence of a mortgage in principle may come in handy when you apply, so it is worth bearing that in mind when you make your plans.
Repayment terms are usually much shorter on auction finance, and you will also be charged a higher rate of interest compared to standard mortgage arrangements. It is understandable for people to ask are bridging loans expensive? but compared to what?
What other loan type allows you to borrow 75% of a property value and spend it how you wish, without needing to prove income?
As long as you plan far enough in advance of the auction, you should be able to benefit from auction finance. The quicker you can act when preparing for an auction, the stronger position you will be in.
Bridging loans are incredibly flexible, available to most people and suitable for many different types of property. Options are available for properties of non-standard construction and even when the house is uninhabitable.
It is temporary asset finance, so it could be used to buy a house that is suffering from subsidence. Once the problem has been rectified you can obtain an underpinned property remortgage to pay off the bridge.
The lenders are most concerned about the property value and how you will repay them. So if your income position is difficult to prove or your credit history is less than perfect a bridge loan is still an option for you. We have a separate article that answers the question Can you get a bridging loan with bad credit?
Where the property you are buying will be your main residence, the bridging loan will need to be regulated by the FCA. There are fewer lenders who are able to offer these and the initial mortgage underwriting requirements are more stringent than if you were buying a pure investment property. The following article explains this in more detail: Are bridging loans regulated by the FCA?
Finding a lender that is happy with a cross-collateralisation situation could allow you to borrow more than 75% LTV, and upto 100% in certain cases. A cross collateral bridging loan is secured across more than one property, increasing the available funding amount.
You can even borrow money to buy some land or a plot, while you wait for planning consent, which will then increase the value. This is known as planning gain finance or pre-planning finance.
Auction finance can be a great way to purchase a property quickly, especially if you are not able to get a mortgage from a traditional lender. However, it is important to do your research in advance and make sure that you are aware of the costs associated with this type of loan.
An experienced broker can provide you with a world of help in this area.
