How to use bridging finance to purchase property at auction
Paul Elliott, Managing Director of Propp sat down to talk about the rise of the property auction and how bridging finance is playing an important part in its growth.
Bridging finance traditionally was used to bridge the gap between selling your home and buying a new home or a measure to prevent a chain break. But in more recent years, it has become a real powerful tool for property investors, particularly when they’re looking to buy at auction.
Previously, buying at auction was really only in the arena of cash buyers, largely due to the short turn around times that make it very difficult to purchase using a traditional mortgage.
But now by using bridging finance, you can start to grow an investment portfolio very, very quickly.
Why since lockdown has purchasing at auction become more popular?
First of all, the move from inhouse auctions – which can be quite intimidating if you have little experience with them towards online auctions has had a big impact on the numbers of people getting involved with property auctions. Many people that would have not normally felt comfortable going and standing in the room, particularly if it’s their first time at auction were suddenly able to bid remotely.
Lockdown forced the industry to leap forward years in terms of digital innovation. Traditionally estate agents and auctioneers are old fashioned and slow to adopt technology, but a rapid acceleration was needed in order to move house sales offline, and many companies rose to the challenge. One example is Bamboo Auctions, which gives auctioneers a plug-in technology which enables them to run their own online auctions.
Why do people buy property at auction?
The main reason you’re looking into auction property is because you’re looking for a bargain. You know, we’re all after the bargain. We all love property. There’s a long running programme that’s followed auctions and I think that’s part of our psyche as a nation.
So quite often you’re looking to go there to pick up something that’s under market value that you can either add value to and make it into your own home or as an investment to make profit.
Purchasing property can often be slow and arduous, and so if you’re an investor that’s looking for quick turnarounds the 28-day completion deadline that comes with an auction property can be really attractive.
Why is bridging finance so widely used for auction purchases?
The main factor really is speed. An experienced broker can get a bridging loan over the line in a matter of days when the urgency is there, although typically they take a few weeks – which is more than enough time to meet the 28 day deadline.
It’s also much more readily available these days in comparison to how it used to be. There are also far more lenders in the market than there were maybe 10 or 15 years ago which has had a positive impact on costs and rates, and it’s a great way of actually leveraging your own money.
Rather than having to put your own cash into one project you can use someone else’s money to help fund the project which means you keep more money in your own pocket to either spend on the renovation or to put straight into another investment.
It’s a very good tool to help investors to quickly grow a portfolio.
Aren’t bridging loans expensive?
Relative to current traditional mortgages the rates are higher, partly because we’ve been in such a low interest rate period for the last 10 or 15 years.
The average current bridging loan rate is around half of what you would have seen with a traditional mortgage 20 years ago.
Still, it can seem expensive, but what we try to explain to clients is you need to look at the end result. So, if it’s costing you X amount to buy the property using this finance, but it enables you to turn a property around and sell it in under 12 months for £30,000 profit, then you can make a decision about whether you feel that’s worthwhile for you.
What do I need to be aware of when using bridging finance?
The main thing to consider is whether you have a credible exit plan. A lender will need to understand how you’re going to repay them. It’s important you make sure that you’ve done your due diligence if you’re buying a property with a view to keeping it as a rental asset. Are sure you can refinance onto that buy-to-let mortgage? Will you be able to rent the property out for enough to make it profitable?
If you’re buying it to sell, are you confident you can secure the property, add value to it and sell it for a good enough profit to be able to make it a viable project? Can you sell it on time? There are always time limits on bridging finance, so your plan needs to be realised within the timescales that you’ve set.
Who are the best bridging loan companies?
Well, that really comes down to the individual project and that’s why its so important to rely on a bridging broker that understands the waxing and waning of the market to ensure your case gets placed with the most suitable lender.
There are some lenders that are really quick and flexible that work well with auction property purchases. Other lenders may not be so quick but are excellent when it comes to getting a handle on complex situations. So, it’s all about understanding the project, which is where our team come in.
Comparing the market to try and find the right lender and the right price point is crucial to maximising your project’s profitability.
You’ll find that some lenders are really, really good at one point and then they get really busy and their SLA’s go through the roof so you move to another lender that have got capacity to take on the case. So again, it’s all about understanding the market.
Compare bridging finance
Our specialist property finance comparison site, propp.io is the first of its kind in our industry. Normally you’d have to speak to multiple brokers to get a few rates and costs to compare and then have brokers hammering your phone when you might not be at the stage where you’re ready to progress yet.
Our tool gives you access to the costs of bridging finance from a huge segment of the market to allow you to freely compare and assess the costs without having to handover any personal details.
Propp.io lets you compare bridging loans, commercial mortgages and development finance We help lift the lid on the cost of borrowing in these sectors to give clients the insight into those costs before they embark on the next project.
Click here to start comparing bridging loans. We save our clients on average over £8.5k on their deal when they use our optimiser.