Financing a Property Purchase at Auction
Property auctions can be a fantastic way to secure a quality residence at a bargain price. This guidance from Revolution Finance Brokers looks at the pros and cons and the best ways to confirm your purchase with effective financing.
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Financing a Property Purchase at Auction
Property auctions need you to move quickly, and auction finance or a bridging loan can be the best option to put funds in place in time.
Here we'll run through how auction finance works, and what criteria a lender will assess.
What Sort of Loan is Auction Finance?
Auction finance is a type of bridge loan, secured to help you pay for a property sold at auction quickly. This lending is short-term, and interest-only, and is substantially faster to organise than a traditional mortgage.
Expedited bridge loans can be arranged in just a few days, and usually require only a valuation of the auction property to proceed.
Interest rates are higher than a mortgage, as you'd expect from a short-term loan, but can help you complete an auction purchase whereas a mortgage would have taken too long to arrange.
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Is There a Specific Auction Finance Loan?
No, you can use your bridge finance for multiple purchases, but you'll need to specify during the application what the funds are for.
Auctions require you to pay a 10% deposit as soon as you have placed the winning bid, and you usually have 28 days to pay the balance - which isn't enough time to secure a standard mortgage.
If you fail to remit the balance, you could lose the 10% deposit, and the property will go to another investor.
Can I Buy a Property at Auction Before I Have My Loan Application Approved?
You can, but if the application falls through, or doesn't complete in time, you might lose your deposit.
It is advisable to have an agreement ready to go to make sure you can pay the balance within 28 days.
How Long are the Terms on a Bridging Loan for an Auction Purchase?
Bridge loans are typically only for up to one year.
You can get bridging finance for as long as 18 or even 24 months, with the maximum repayment period being three years.
What Interest Do I Pay on a Bridging Loan?
There are a few ways a lender could calculate the interest on your auction finance:
- Monthly interest means that you need to pay the interest each month, and then repay the original loan value when the term ends.
- Rolled up interest means that you don't pay the interest as you go, but that the charges are rolled up into the total debt, and you need to pay it back in one go.
- Retained interest calculates what you will owe, and adds the monthly interest to the total balance payable. You pay back the complete balance, including capital and interest, at the end of the term.
How Much Deposit Do I Need for a Bridge Loan for an Auction?
Most bridge lenders offer Loan to Value ratios of up to 70% or 75%, so you'll need a deposit of 25% to 30%. If your application is considered risky, you might need a deposit as high as 50%.
There are 100% bridge loans out there, but you will need to offer additional security to be approved for an auction loan without a deposit.
Can I Purchase any Auction Property with a Bridging Loan?
Pretty much, yes. Bridge finance isn't as strict as a mortgage application, so you can usually buy anything from commercial premises to a residential investment and even properties ineligible for a typical mortgage.
- Residential homes - you can use a bridge loan to buy a home to live in, and since it's a primary residence, you will need a regulated lender. The appeal of a bridging loan is that it takes much less time to organise. Once you own the property, you can take your time to remortgage and repay the bridging debt.
- Commercial and mixed-use premises - bridge lenders will consider retail purchases, although some will have specific restrictions against financing higher risk premises such as petrol stations. Others will lend up to 50% or 60% of the purchase cost.
- Uninhabitable properties - auction properties are often dilapidated buildings needing extensive renovation. Bridge finance is an excellent option since you cannot usually mortgage any property considered uninhabitable. You could apply for a bridge loan to cover the plot's cost, and the renovation works, and then sell the property or remortgage it to pay back the debt when the work is complete.
You can indeed. Companies can borrow a bridge loan through most auction finance lenders, and the terms are usually quite comparable. Lenders might require a personal guarantee from the directors to go ahead.
Yes, provided you have a good exit strategy, you can buy almost any property at auction.
There's no reason why not! Again, you need to show what your exit strategy is. Bridging loans can legally be used for any purpose.
If you're considering buying an auction property, or have already bid and need funding fast, a bridging loan is an ideal solution. Give Revolution a call on 0330 304 3040 or email the team at email@example.com to get the application process started!
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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.
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