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Buying a property at auction can be an excellent way to secure a lucrative investment or snap up a home that has a reserve price below the average market value you'd expect to pay.
However, one of the primary issues is financing.
Mortgage lending can take a few weeks to organise, and even with the help of an experienced broker, there is little guarantee that you'll have a confirmed mortgage on the table in time to pay the auction house within 28 days.
Step forward auction finance - a short-term form of borrowing with an expedited process, specifically designed to help secure a property bought at auction within the speedy deadlines.
We'll run through the basics of how auction finance works here - but if you're considering bidding at auction, it's firmly advisable to get an agreement in principle ready now, so you're confident you will have the funds to go ahead in time
Property Auction Finance - How Does it Work?
While you can secure auction finance after the auction room sale, it's advisable to confirm the finance beforehand to lessen the risk.
This option also allows you to work within your agreed budget at the point of sale.
Buying a property at auction can be a great way to cut out the lengthy process of buying a house - without the solicitors and surveyors.
Once the hammer falls, the contract is signed, and a non-refundable deposit is put down on the day. The sale is completed within 28 days.
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The Benefits of Using an Auction Finance Broker
Until a more permanent form of repayment is in place, such as a mortgage, you will need finance to secure the property.
As money might not be readily available, auction finance is a quick way to bridge the gap, especially if money is tied up in other ventures.
The popularity of auction finance is due to the speed at which buyers can access it. Bridging loans are the most common form of auction finance, although there are other types available.
Investors can use the loan to finance the entire price of the property, the deposit, or the balance.
An auction finance broker is strongly advisable since the rates you pay on this short-term borrowing vary substantially between lenders. Independent brokers can identify the most profitable products on the market and the lending terms that offer you the best deal on your purchase.
How Risky is it to Bid at Auction Without an Auction Finance Deal in Place?
It can be a considerable risk - you need to pay a 10% deposit on the day, so failing to get your auction finance in place can mean forfeiting that down payment and losing out on the property!
We'd always advise you to seek expert counsel from the Revolution specialists before proceeding.
Still, suppose you have 10% of the purchase price to put down on the day.
In that case, 28 days may be enough time to take out a bridging loan to complete the transaction - but if you find yourself in this position, please get in touch as a matter of urgency, as 28 days is a short turnaround time to arrange your financing!
How long is the Term on a Typical Auction Finance Bridging Loan?
The majority of bridging loans are short-term and must be repaid in 12 months or less.
Longer durations are available, with some providers offering 18-24 month contracts, but the longest you'll probably find is 36 months.
Purposes of an Auction Finance Bridging Loan
If you're using bridging finance, rates tend to be a lot higher than traditional mortgages.
However, as the loans are short term, they remain an ideal way for investors to secure property finance and take advantage of deals they wouldn't be able to otherwise.
This type of finance is suitable for commercial, mixed-use properties, land, and residential properties.
Auction finance rates change all the time. Get in touch with an adviser today to find out what the latest rates are.
Deposit Requirements for Auction Finance Borrowing
You'll usually need a 10% deposit for the auction house - but a bridging loan lender may also have a maximum Loan to Value (LTV) cap they'll lend against the value of the property.
The standard is about 70% to 75%, so you might need a deposit of between 30% and 35% when accounting for the interest.
If the auction purchase is considered a higher risk, a lender might offer a maximum of 60% or 50% of the property value. However, the definition of high risk depends considerably on the lender's policies.
Usually, a broker can advise on ways to strengthen your application and improve the LTV you can borrow.
For example, a strong exit strategy can significantly reduce the lender's perceived risk.
You can borrow up to 100%, although you will usually need another form of security such as a separate asset or property to ensure the lender is comfortable with the risk.
How Does Auction Finance UK Work?
If you're considering buying a property at auction, you must understand how the buying process works and the optimal time to get your finance agreement in place.
Step One: Consult a Specialist Auction Finance Broker
Whether you're already found a property you intend to buy or are considering attending an auction with a view to placing a bid, it's worth getting an agreement in principle before the day.
It's essential to find the right lender, as some will be more suitable than others, depending on your circumstances.
Revolution Brokers are specialist mortgage advisors who can match you with the right lender to meet your needs.
Step Two: The Assessment Process for Property Auction Finance
The lender will want a property valuation and to see proof of your earnings, credit rating and financial history.
There is help for individuals with less than perfect credit, so don't be put off.
Step Three: Budgeting for Together Auction Finance
The loan could be for part or all of the property - and you must consult a broker to identify the correct lender.
While some larger banks may offer competitive deals, it's also essential to review your circumstances, as this could significantly affect your eligibility and which lender the Revolution team would recommend you choose.
A specialist adviser will tell you the percentage you can borrow and how much you'll need to offer upfront.
Step Four: Completing an Auction Finance UK Deal
Once the auction is complete and you have placed the winning bid, you'll need to pay the 10% deposit straight away and then get to work in finalising your complete auction finance application and submitting any last bits of paperwork.
You'll have 28 days to complete the sale. Your lender will then release your funds to the vendor's solicitor, and the deal is complete!
If you're thinking of buying a property at auction, get in touch with Revolution Brokers today for expert advice.
Particularly for an investment property - one of the most popular purchases at auction - it's essential you negotiate competitive rates on your auction finance.
In some cases, a specialist lender with expertise in auction lending can offer substantially more beneficial terms than any open market lender, so it's worth scanning the market through a broker to ensure you're maximising your profits, and minimising interest fees.
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.
We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.