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When buying a property at auction many property investors and developers will use auction finance to help fund the purchase.
Auction finance is also known as bridging finance and is effectively a short-term mortgage secured against the property. Buyers will need to put down a deposit, often 25% of the purchase price.
Auction finance is used as a short-term option to enable buyers to quickly complete on the purchase, before using conventional mortgages to pay back the loan. Alternatively, the buyer may quickly get the property in a saleable condition and sell the property to redeem the loan.
One of the most critical elements of financing a property purchased at auction is speed: good brokers and auction finance lenders can work with you to ensure funds are released in time.
You can compare the costs of auction finance using our price comparison tool, but it would be prudent to do a little more research to check that the auction finance can be secured. Our deal optimiser service will help negotiate interest rates and terms with potential lenders.
The rates shown on our site are the indicative rate ranges that auction finance lenders give out. However, we are able to work with investors to professionally present their project to lenders with the aim of negotiating the best possible deal.
As an investor you may want to ensure you have sufficient cash available for buying and renovating property; having cash set aside for contingencies; or to take advantage of opportunities that come your way.
Using auction finance can keep you liquid and enable you to buy a property that would not normally get lending against, for example residential properties with no functioning kitchen or bathroom.
When the hammer drops, you enter into a legally binding contract to purchase the property. Properties at auction must be paid within strict timescales, usually 28 days. A mortgage for auction, including the legal process can be completed in a matter of days. Typical mortgages usually take much longer than 4 weeks to complete so you might find yourself in a situation where you need quick short-term finance to bridge the gap. Auction finance lenders are also much more flexible than high street banks and building societies, which means that you can obtain finance despite the property not being in a habitable condition.
When getting a mortgage to purchase a property at auction the same principles usually apply as when you purchase outside of an auction. Properties purchased at auction are usually snapped up by investors looking for a good deal and this can involve property that needs a fair amount of development.
The amount of work required to the property is likely to have a bearing on the deal offered by lenders. For example, a property that requires structural changes or planning permission might be labelled as a heavy refurbishment. Lenders are still happy to lend on these properties, but you may find the deposit you need to put down may be higher.
A property may need gutting, with new kitchens and bathrooms, stud walls and total redecoration etc. Despite this, lenders may still classify this project as light refurbishment, especially if the project appears profitable. Try to understand the cost of works vs the end value once the works have been completed (the gross development value), as these figures will help you get an offer from a lender.
The amount of experience a property investor has will also help determine how competitive the interest rate is that we negotiate.
Our lenders offer loans that range from £50,000 to £15 million. For an investment property purchase the amount you can borrow will not be determined by your income. Instead, lenders will want to be comfortable with the property, know that the project is a profitable one and be happy that you have a clear sensible exit strategy to repay the loan.
Broadly, the larger the deposit you can put down the more competitive the interest rate, and potentially more flexibility from the lender (such as only paying for an automated valuation rather than a survey). Historically, borrowers had to put down at least 25% deposit as most lenders wouldn’t offer loans in excess of 75% LTV (loan-to-value). However, many lenders will now offer a mortgage for auction with a smaller deposit. For equity-rich landlords and investors you may be able to borrow up to 100% of the purchase price by allowing the lender to apply a charge not just against the property you are buying but also against other property too.
As auction finance is a short-term form of finance, costs are generally higher than longer term loans. In addition to a monthly interest rate being charged on the loan, you will also have to pay some fees. The typical fees for auction finance are:
Auction finance lenders assess eligibility based on the following criteria:
Auction finance is a type of unregulated borrowing, so this means that lenders have the flexibility to assess applications on a case-by-case basis.
One of the most complicated areas is how auction finance works. That’s why we are here to help cut through the financial jargon and take a look at how auction finance works.
Auction finance is like mortgage lending in some ways, but completely different in others! Here are some of the key points:
You know that old saying “You should never take a risk without doing your due diligence first”? Well, we’re going to add a little twist to that: “And you should never take a risk without having your auction finance in place!”
That’s because if you choose to buy at auction without doing your due diligence first, and without having your auction finance in place, it could cost you – in more ways than one. You’ll face legal consequences and financial penalties, which will just make your life harder.
Auction sales are legally binding once the hammer falls, so you'll also be in breach of contract. You'll lose your deposit (or reservation fee) and may face other costs on top.
Of course, we'd advise against taking these undue risks.
It’s a little-known fact that you can buy an auction property before the auction itself.
It’s called “pre-auction,” and it means you can make an offer on a property before the bidding starts.
Most auction houses will welcome pre-auction offers, and if you are really interested in the auction property up for grabs, then a prior offer is a great idea.
Bear in mind that if your offer is accepted, the sale will still go through under auction conditions, meaning you will have to pay the deposit or registration fee immediately. If you don’t pay these, as mentioned before, you will face heavy penalties.
We would therefore recommend doing all your pre auction prep as normal:
Once you’ve done all the above, it’s time to contact the auction house with an offer.
To sum up there are three things that you need to do in order to use auction finance successfully: Assess whether this is a viable option for you, do your research about the property and the current market, and be able to pay for the property upfront. These things will help you pull the curtain back on a new world of investing and will allow you to feel in control of your investment by ensuring that you can dictate the terms of your purchase.
Our free deal optimiser service saves on average £10,475†.
* bespoke quotes supplied the next working day following provision of all required lender information being supplied and validation by Propp case manager
† saving based on annualised interest rate saving where deal optimiser service negotiated a lower rate than lender’s published rate, based on current average saving of 0.9% and average loan £1051785. Time saving based on automated versus manual bespoke rate requests.
† saving based on annualised interest rate saving where deal optimiser service negotiated a lower rate than lender’s published rate, based on current average saving of 0.2%. Time saving based on automated versus manual bespoke rate requests.