How to Get Finance for an Auction Property

Timing is everything when you’re buying a property at auction. Payment deadlines are tight once the hammer has fallen and traditional forms of borrowing, like mortgages and bank loans, are usually a no-go since they take too long to arrange, process and finalise.

This is where auction finance comes in. This niche type of finance is specifically designed for people who are buying property under the hammer; but how does it work, how do you apply for it, and what’s the best way to make sure you get a good deal?

In our complete guide to auction finance, we answer all of these questions and more.

What is auction finance?

Auction finance is a type of bridging loan that’s specially designed for people who are buying property at auction. One of their main selling points is that they’re very quick to arrange, usually even faster than regular bridging finance agreements.

This is good news for auction buyers since payment deadlines are tight after the hammer has fallen on a property transaction, and this often means that other forms of finance, such as mortgages, are of little use due to the time they take to arrange and finalise.

When buying property at auction in the UK, successful bidders typically need to have 10% of the purchase price ready to hand over once the auction has ended. Full payment is usually due within 28 days, and auction finance is well placed to meet these deadlines.

How does it work?

Like traditional bridging loans, auction finance is offered on a short-term, interest-only basis. It’s possible to get your funds within 14 days of application, provided you have at enough deposit (or another property/asset as security) and have evidenced a clear exit strategy.

The exit strategy is basically how you plan to repay the debt at the end of the term. In most cases where a property or land is involved, the exit strategy is usually a remortgage or the sale of the asset. Auction finance lenders like to see either evidence of its saleability or an agreement in principle as proof that you have a viable exit strategy in place.

Term lengths for auction finance are much shorter than mortgages. Loans are usually repayable within 1-24 months, but some lenders might agree up to 36 months.

How much deposit you will need

You will need at least 10% deposit to buy a property at auction, or failing that, another property or asset of equivalent value to serve as security. The more deposit you can put down, the better your chances of landing a favourable interest rate.

How much will it cost?

You can use our calculator below to get a rough idea of what your repayments will look like.

What kind of interest rates to expect

Interest rates on auction house finance are usually higher than the rates for mortgages and similar to what you’d likely get on a regular bridging loan. The exact amount of interest you’ll pay will depend on the quality of your application and how the lender charges interest.

Jump ahead to the Eligibility section of this article for more information about what makes a strong auction finance application.

Auction finance lenders usually charge interest in one of three different ways…

• Monthly: You pay interest monthly and the full debt is due at the end of the term.
• Rolled up: The monthly interest is tallied up and added to the loan amount at the end of the term. The cumulative total is payable in full at the end.
• Retained: The lender calculates how much you will owe at the beginning of the term by adding the monthly interest payments to the loan amount. You essentially ‘borrow’ the interest, usually for a set period, and pay everything at the end.

Types of property you can buy

Auction finance can be used to buy a wide range of property types, including…

• Residential
• Commercial
• Mixed-use
• Unmortgageable properties
• HMOs
• Land (with and without planning permission)
• Agricultural properties

Auction finance can theoretically be used to buy non-property assets, such as vintage cars and high-value machinery, but speak to a mortgage advisor before applying for it for purposes like these. There’s a high probability that another type of borrowing could be a better fit.

How to apply and get the best auction finance deal

Once you’ve identified a property you want to bid on and set aside enough deposit , you can approach an auction finance lender to apply for an agreement in principle. This will tell you whether you qualify for the funds you’ll need and the rates available to you.

But before you press ahead with this, there are steps you can take to boost your prospects…

• Have your documents ready in advance: You’ll need proof of your deposit and exit strategy in advance as well as a valuation report. You can find a full list of the documentation needed in the FAQ section of our complete guide to bridging finance.
• Download your credit reports: Be prepared for the lender to carry out a credit check. While bad credit is only a major issue if it puts the exit strategy at risk, challenging inaccuracies on your reports and having outdated information removed could boost your chances of landing a good deal. Download your credit files here.
• Speak to an auction finance broker: Talking to a broker who specialises in auction finance before you begin can significantly increase your chances of success. They can offer bespoke advice, make sure you find the right lender straight away, and negotiate the best interest rate on your behalf.

Your broker will guide you through all of the next steps, which will include making a winning bid on the property you want, putting down a deposit and completing within 28 days.

Find out whether you’re eligible

Auction finance companies assess eligibility based on the following factors…

• Exit strategy: The stronger your exit strategy, the more likely you are to be offered a favourable auction finance deal. This means providing evidence that the property you’re buying will sell or remortgage for the desired amount. If it’s a development project, it will likely help your cause if you have experience in this field.
• Deposit: Most lenders have minimum deposit requirements of 10-25%, but putting down extra will boost your chance of securing a low interest rate.
• Credit history: Clean credit will always boost your chances of securing a good auction finance deal, but bad credit is only a deal-breaker if it puts the exit strategy at risk.
• Property experience: While it’s possible to get auction finance as a first-time buyer, under the right circumstances, having experience with similar property purchases and a strong track record can boost your eligibility. If you already own property it can be used as extra security to further increase your creditworthiness.

Since auction finance is a type of unregulated borrowing, lenders have the flexibility to assess applications on a case-by-case basis. This means that there’s no cause for panic if you don’t meet the above criteria to a tee – there could still be lending options for you.

Get matched with an auction finance broker today

The services of the right auction finance broker could be the difference between approval and rejection, or landing a good deal and being lumbered with unfavourable rates.

Every auction finance advisor tends to have a specific area of expertise. For example, some specialise in commercial properties, some first-time buyers, and others land purchases. It’s important that you find one who has the expertise you need, and we can help you with that.

We offer a free broker-matching service that will quickly assess your needs and circumstances to handpick the perfect auction finance advisor for you. Call 0808 189 2301 or make an enquiry and we’ll set up a free, no-obligation chat between you and them today.