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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.
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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.
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.
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.
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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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.