Almas Uddin
Founder and Mortgage Advisor
24 Dec 2023
Tips to Financing an Auction Property Purchase
Buying a property at auction can be a fantastic way to find a real bargain - but when it comes to taking out a mortgage, the process isn't quite so simple!
The biggest challenge for auction property purchases is the timing.
Mortgages take time to apply for, with all the eligibility and affordability checks involved. This situation is where auction finance is worth its weight in gold, providing a short-term, fast turnaround loan to ensure you don't miss out on a dream purchase or end up losing your deposit.
In this guide, the mortgage brokers team explains how to finance an auction property investment and the ins and outs of this valuable borrowing option.
For more information, or to get your auction finance application started, get in touch at 0330 304 3040, or email the team at [email protected].
How Does Property Auction Finance Work?
In essence, an auction property loan is similar to a bridging loan - and often, the same product just applied differently.
The loan is short-term and repaid on an interest-only basis.
For buyers, the significant benefit is that it is speedy to arrange and takes a fraction of the time a regular mortgage application would - essential when you have a tight 28-day deadline before you lose your auction property!
Yes, the interest rates are higher than on a standard mortgage, but the idea is that the loan is refinanced quickly, but without the stress of urgency when there is a payment cut-off date looming.
Do I Need Property Auction Finance?
If you attend a property auction, you can bid on any lots without having your finance in place beforehand.
You might not have anticipated purchasing some cases and will need to move fast to hit the auction payment deadlines.
All you need to have is a 10% deposit of the final price, paid straight away when the bidding ends.
Here's how the payment process works:
- You pay the 10% deposit on the day, which is a requirement to secure the purchase, and compulsory to make a successful bid on auction property.
- The 90% balance is due within 28 days of the auction.
- If you don't get a mortgage or loan in place by then, you stand to lose that 10% deposit.
Auction finance lenders usually have fairly generous criteria, but the key is to demonstrate how you will refinance the loan (called your exit strategy).
For many buyers, the exit strategy is to take out a mortgage to refinance the auction loan or sell another property and use the proceeds to pay back the borrowing.
How High Risk is Buying an Auction Property Without Finance Pre-Approval?
As we've discovered, you don't need to have pre-arranged finances in place, and there is a risk. For example, if you were unable to secure any borrowing, your deposit might be forfeited.
If you anticipate bidding on a property at auction, it is beneficial to contact the Revolution brokers team beforehand and ensure you have pre-approval ready.
That means, if you do find an excellent investment or an ideal home, you have the security of knowing you won't struggle to pay the balance through your property auction finance.
What is the Loan Term on a Property Auction Finance Loan?
As a type of bridging loan, you're looking at shorter-term finance than a mortgage - but an independent broker can provide a range of options in terms of the repayment date.
Most auction finance loans need to be paid back in around one year or less, but you can find products with a long term running up to 18 months, two years, or even three years in some circumstances.
What Are the Interest Rates on Auction Property Finance?
Interest rates very much depend on factors including:
- How much you need to borrow.
- For how long.
- What your exit strategy is.
- Your circumstances and affordability.
- The type of property.
The interest can be calculated in three alternative ways.
- Monthly interest payments - you pay the interest every month, with the original loan balance payable at the end of the term.
- Rolled interest - the interest is added to the total borrowing value, and the full amount needs to be repaid when the loan ends.
- Retained interest - the lender works out the total interest payments and adds these to the loan value. Then, you borrow the interest over a fixed period and again pay the total at the end.
What Deposit Is Required for a Property Auction Loan?
The 10% deposit is the amount paid to the auction house to secure the property.
You will also typically need a reasonable deposit for your auction finance. Many lenders will offer up to 70% or 75% of the property value (the LTV, how much you wish to borrow against the purchase value).
Therefore, you'll need a deposit of around 30% of the property value.
If the purchase is higher risk, you might need a larger deposit of 40% or 50%.
Lenders all have different policies dictating what they deem as higher risk. Still, the most common factor is your exit strategy. Working with a whole-of-market broker to prepare your application and demonstrate your exit strategy can resolve this potential issue and avoid needing a higher deposit.
You can get a property auction loan up to 100% of the value but will generally need another property or asset to offer as security.
Remember that this option is also likely to incur extra charges for asset valuations.
Can I Use a Property Auction Loan for Any Property Purchase?
Ordinarily, yes, there aren't any restrictions on the types of property you can buy using auction finance.
- Residential purchases can be financed with a bridging loan, although your lender must be regulated if you plan to live in the home. The typical exit strategy would be a residential mortgage.
- Unregulated lenders can finance commercial or mixed-use auction properties through a bridging loan. However, some lenders will put restrictions on investments they consider higher risk, such as a petrol station.
- You can't purchase uninhabitable properties with a regular mortgage, so auction finance is a good alternative. Bridging loans are far more flexible, and so you can buy a low-price auction lot, renovate the property, and sell it at a profit. The lender will need to know whether you have completed any similar developments in the past and what contingency plans you have for the development budget,
If you are considering buying an unusual property at auction, please get in touch with the Revolution team, as we will be able to advise on the best lenders and financing options available.
How Can an Auction Finance Broker Help With My Application?
Revolution Brokers deals with hundreds of auction property finance applications - and our role is to ensure you get the right deal, at the best rates, from the most suitable lender.
There are several factors to consider, so the team can provide independent support to help you make informed decisions. For example:
- If you buy a residential home, you need a property auction loan from an FCA regulated lender.
- For commercial properties or investments, you can use an unregulated bridging loan provider with greater flexibility.
Choosing the right lender is essential since an unregulated lender will be able to offer a loan based on rental income expectations rather than basing their offer on your salary or annual income.
How Can I Get the Best Rates on Property Auction Finance?
Lenders will assess every application individually, but they will always consider the following factors in deciding what interest rates to offer:
- Exit strategy - the more secure your exit strategy, the better the deal. Usually, that is through a remortgage or selling a property. If you have a mortgage agreement in principle on the table, for example, that will strengthen your application.
- Credit history - although auction finance is more flexible, we strongly advise seeking guidance from an independent broker if you have any issues with your credit history. Some lenders are stricter than others, and so it's wise to ensure you're applying to the most suitable provider.
- Property experience - you don't need to be an experienced developer to get a property auction finance loan. Still, if you plan to renovate or develop a dilapidated auction investment, it can help. But, again, it's all about assessing the borrowing you need and recommending the right lender.
- Deposit - the more significant your deposit, the lower the lender's risk and the better interest rates they can offer. If you have a minimum deposit of around 25%, you can often still find auction finance but won't be offered competitive interest rates as if you have a higher 40% down payment.
- Security - auction properties can vary vastly in condition and value. If you buy a sellable home in reasonable condition, your rates will be lower than purchasing a major development project or one where it is difficult to assess the final sale value.
The best way to secure the lowest possible interest rates on your property auction finance is to deal with an independent, whole-of-market broker, such as Revolution Finance.
We compare all of the deals on the market to provide tailored guidance, ensuring your application is approved without a hitch. So give us a ring on 0330 304 3040, or email us at [email protected].
FAQs
Can I Get a Property Auction Loan as a Limited Company?
Yes! You can take out a bridging loan as a limited company on a similar basis to a buy to let mortgage. Some lenders will ask for the director's personal guarantees as added security.
Can I Buy a Repossession Auction Property With Bridging Finance?
Provided you have a reasonable exit strategy to show how you will repay the bridging finance; you can use an auction finance loan to buy any property at all.
Are There Bridging Loans for Vehicle Auctions?
Potentially, yes, bridging loans can be used for any purpose, provided the lender is happy with the deal and the security you have to offer.
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