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.
For more information on bridge loans for property auctions, or to get an application started, contact Revolution on 0330 304 3040, or email the team at firstname.lastname@example.org.
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.
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.
What Different Types of Auction Finance Lenders are There?
Revolution Brokers are experts in auction finance, and recognise that there are different types of broker and lender out there to be aware of:
- Regulated brokers and lenders are governed by the Financial Conduct Authority rules, which means you have assurances about their conduct and professionalism.
- Unregulated lenders can offer competitive deals on investments through bridge finance; provided the property isn't somewhere you intend to live as a private residence. For example, buy to lets or investment developments can be easily financed through an unregulated bridge loan.
What Application Criteria Will Help Me Get The Lowest Rates on Auction Finance?
The stronger your application, and the lower the risk to the lender, the better the interest rates you will be offered:
- A viable exit strategy reduces the risk considerably. For example, if you plan to remortgage and have an agreement in principle, this represents a stable exit plan.
- Having a good credit score is also a plus - although specialist bad credit lenders can usually help in any scenarios.
- Development experience, if you're borrowing to buy and renovate a home, is also an advantage. That gives the lender confidence that you have the knowledge to complete the renovation and sell it profitably.
- The size of your deposit is also essential, and although you can get action finance with a deposit as low as 25%, the higher the value, the better the interest rates.
- Security is another vital factor, as the lender will need to offer security. Using a valuable property with plenty of equity that would be easy to sell will improve your chances or approval and reduce the risk factor.
FAQs - Bridging Finance to Purchase Auction Properties
Let's look at some of the most commonly asked questions about auction finance lending.
Can I Get a Bridge Loan for a Limited Company to Buy Property at Auction?
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.
Are Auction Finance Loans Available to Buy Repossession Properties?
Yes, provided you have a good exit strategy, you can buy almost any property at auction.
Can I Get Auction Finance to Buy a Car?
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.
Auction Finance Expert Advice
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!