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How to get finance for an auction property

Need a bridging loan to buy property at auction? Get the right advice here.

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 25th June 2019* | Published: 23rd November 2018

When buying a property at auction timing is of the essence, and long-term forms of borrowing like mortgages are tough to arrange ahead of deadlines. This is where auction financing can help you out, as these short-term loans can be quick to arrange and flexible enough to meet the need of anyone who’s purchasing under the hammer.

We get tonnes of calls from customers who are interested in buying property with auction finance, and this article covers the most important info you need to know about the subject.

The following topics are included below…

What is auction finance?

Auction finance is simply another term for a bridging loan, used when this form of borrowing crops up in the context of auctions.

Property auction bridging loans are offered on a short-term, interest-only basis and can be super-fast to arrange. It is possible to have a conditional offer on the table within days of the initial application, subject to a valuation being conducted on the property you’re buying.

Home auction financing, like any other type of bridging loan, typically comes with a high interest rate compared to other forms of borrowing, such as mortgages and homeowner loans, but the lending criteria can be more flexible.

How bridging finance for auction property purchases works

We often hear the question “can you bid at an auction, subject to finance?” and the answer is technically yes, so long as you have 10% of the purchase price ready hand over when the hammer falls, and are prepared to lose it if you can’t then get the finance you need!

That 10% will serve as your deposit and paying it on the day is a requirement as part of the auction bid. The remainder of the full balance will then be due within 28 days, which may not be enough time to arrange a standard mortgage or a homeowner loan.

This is where a bridging loan for auction properties comes into its own, as securing one quickly enough to meet this deadline is realistic, providing you’re eligible.

Most providers’ lending criteria hinges on the exit strategy, i.e. how you will repay the house auction loan at the end of the term, and this would usually be via the sale of the property or a remortgage.

Is bidding at auction without loan approval risky?

It can be, so be sure to seek specialist advice from the experts we work with before doing so, but if you have 10% of the property’s purchase price to put down on the day, 28 days may be enough time to take out a bridging loan to fund the rest of the transaction. The risk is in losing your 10%, so it’s best to get an approval upfront!

How quickly do property auction loans have to be repaid?

All bridging loans are offered on a short-term basis, and most have to be repaid within 12 months or less. Longer terms are available, as some providers will stretch to 18-24 months, but the lengthiest you’re likely to find is 36 months.

How is interest calculated on a short term auction loan?

Like with any bridging loan, the lender will charge you interest in one of three ways…

  • Monthly: You make interest payments each month and the full loan amount is due at the end of the term.
  • Rolled up: The monthly interest charges are 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.

How much deposit do I need for auction loan approval?

Bridging finance is usually capped to a loan to value ratio between 70-75% for the most straightforward cases, which means you’ll need a deposit of at least 30-35% of the property’s value since the interest is also factor in.

For higher risk deals, the LTV can drop to anywhere between 50% and 60%, and what is classed as risky will vary from lender to lender.
As a general rule, though, if there is any doubt surrounding your exit strategy paying out, you might be dubbed risky.

Higher LTV agreements do exist - it’s possible to get up to 100%, though this usually means securing the loan against additional properties or assets you already own.
Most lenders are happy with multiple securities, but may expect you to pay valuation fees for each.

What types of auction property can I buy with a bridging loan?

When using bridge finance to buy at auction, there are few restrictions on the property type you’re able to purchase.

Auction-goers often use auction loan financing to purchase residential, commercial and mixed-use properties, as well as ‘unmortgageable’ buildings.

Auction home loans for residential properties

It is possible to use a bridging loan on your home to buy an auction property that you’re planning to live in afterwards. For this, you would need to find a regulated bridging provider.

Borrowers occasionally go down this route because obtaining a mortgage for an auction property can take longer than getting a bridging loan. Once you’ve used the loan funds to secure the property, the exit strategy would be a residential remortgage.

If you need finance for buying property at auction, get in touch. The advisors we work with have access to every lender on the market and can connect you with the one offering the most favourable rates to somebody in your circumstances.

Loans for commercial/mixed use auction property

A number of bridging finance providers are willing to lend to borrowers in the market for commercial property under the hammer. However, there are lenders who place restrictions on certain types of commercial property, such as restaurants and petrol stations, due to the perceived higher risk.

Some will cap LTV at 50-60% and others won’t lend at all.

That said, with whole-of-market access, it shouldn’t be difficult to find a bridging provider who lends for commercial properties, and if the deal is straightforward, the interest rates and LTV are generally the same as for residential properties (70-75%).

For any property with a commercial element, including mixed-use, the lender might ask to see a business plan to assess the viability of the investment.

Auction finance for Unmortgageable / uninhabitable properties

Some properties that go under the hammer are fixer-uppers which need serious renovation work. Even with all of the time in the world, some providers wouldn’t be willing to offer you a mortgage on a property they consider uninhabitable, but bridging loans are different.

If you can convince the bridging lender that you’re capable of bringing a dilapidated building back into a mortgageable state, they might be willing to provide you with funding for the works. The exit strategy would either be a remortgage on the revamped property or its sale.

In order to prove to the lender that you’ll pull off your development plans, it might help if you can evidence past experience in property and convince them that setbacks are unlikely.

What to look for in an auction finance broker

The first thing to take into account here is whether you need a regulated or unregulated auction finance company. If you need a bridging loan secured on a residential property that you’re planning to eventually live in, a regulated bridging lender is what you need.

Regulated bridging loans are regulated by the Financial Conduct Authority (FCA), giving borrowers extra protection against bad advice and mis-selling.

What is an unregulated bridging finance provider?

If you’re looking for an investment property / to secure finance on a property you or your family don’t live in, then an unregulated bridging provider is the way to go.

Unregulated lenders have the right expertise to deal with investment borrowers and are more flexible, enabling them to offer you a bespoke agreement.

For example, if it’s a buy to let property you’re after, an unregulated lender may allow you to borrow based on rental potential, rather than you salary, which may be lower.

The advisors we work will have access to every regulated and unregulated auction loan provider in the market, and if you make an enquiry, they will connect you to the provider who is best equipped to offer you a favourable auction financing deal.

Getting the best auction finance interest rates

All bridging finance applications are assessed on a case-by-case basis but providers usually reserve their most favourable rates for borrowers with the following…

  • A strong exit strategy: The more likely your exit strategy is to pay out, the more likely you are to be offered an attractive deal. When buying a property at auction, the exit strategy will usually be a remortgage or a sale, so having an offer on the table or an agreement in principle usually helps. If the project involves development work, the lender will be keen for you to evidence that your plans are achievable.
  • Clean credit: Although bridging lenders can be flexible, some might not be if you have credit issues which may put your exit strategy in jeopardy. If the exit is a remortgage, some lenders will be cautious of adverse credit borrowers and underwriters might be concerned about further adverse building up over the term. While credit issues that have no bearing on the exit won’t be an issue for some lenders, a clean file will always go in your favour when it comes to rates.
  • Experience in property: Property experience isn’t essential to all bridging lenders, but it may help you convince your provider that you’re capable of pulling off your plans. Some lenders may even insist on it is it’s a complex development project.
  • A healthy deposit: Although you can get a bridging loan with a deposit of 25% (higher if it’s a risky deal in the lender’s eyes), more favourable rates may kick in if you’re able to put down more - 40% or higher is a good, solid, figure.
  • A good security property: Those seeking short term auction finance for a property purchase are more likely to end up on the best interest rates if they secure the loan against a good, sellable property. The lender will be keen to see that the property will raise the required amount at the end of term, and that there are no factors which might deter potential buyers, such as non-standard construction and leaseholds.

Are there auction finance loans for Limited Company borrowers?

Yes, if you’re a Limited Company borrower wanting financing for an auction property, there may be a bridging loan for you. Many auction finance providers cater for Ltd Companies and the interest rates they offer them are usually no different. Ltd Company bridging applications are often treated similarly to Limited Company buy to let applications, so the lender may expect a personal guarantee from each of the company directors before releasing the funds.

Can I use bridging finance to buy at a repossession auction?

As long as the asset/property you’re bidding for can provide an exit strategy (or you have another viable exit strategy in place), there’s no reason you can’t use bridge finance to buy at a repo auction. Technically speaking, bridging loans can be used for any legal purpose.

Can I use a bridge loan to purchase a vehicle at an auto auction?

Broadly speaking, there’s no reason why a bridging loan cannot serve as auto auction financing, as long as you can evidence an exit strategy and convince the lender the deal is worth their while. As previously mentioned, bridge loans can be used for any legal purpose and unregulated lenders have the flexibility to hand them out in all kinds of circumstances.

The loans we are talking about would need to be secured on a property of course, not the car itself. If you want car finance for an auction purchase this may either be best placed with an unsecured loan, or perhaps an asset finance deal (if the car is valuable). Be sure to speak to an advisor to weigh up every option before pressing ahead.

How to get finance to buy at auction

So, you’ve got your eye on an auction property and have decided you’ll be tabling a bid. It’s time to secure some capital to make sure you can foot the bill when payment is due.

The best way to go about this is to speak with a whole-of-market auction finance expert, like the ones we work with. Not only can they tell you how to get finance for an auction property, they can connect you with the lender offering the best deals on loans for auctions.

Speak to an expert bridging finance broker

For further information about how to finance buying property at auction and finding the right broker, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.

We don’t change a fee to connect you to the expert and there’s no obligation or marks on your credit rating.

Updated: 25th June 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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