What sort of options are available for auction finance?
Written by: Paul Thompson on 29th June 2018
Purchasing a property at auction offers many benefits, but the rules differ from ‘standard’ purchases because the legal timeframe for buying is shorter. This means you need to have your finance arranged beforehand, and be able to provide proof of a finance ‘agreement in principle’ on auction day.
When you are the winning bidder, a non-refundable deposit is paid straight away, with the balance of the property becoming due within 28 days. Failing to meet these stringent auction requirements means the loss of your deposit, and a possible claim for damages by the seller.
Short-term bridging loans are a common type of auction finance due to their flexibility, and what is generally a quick lending decision by financiers. So let us have a look at how auction finance works.
How does auction finance work?
Each lender carries out their own due diligence process where they assess your financial situation. If all is well, they provisionally approve your application. Due diligence may include a check on your income, your credit report, and valuing the auction properties mentioned in your application.
Auction finance does need to be flexible given the conditions in which you are purchasing, and specialist lenders exist that meet the specific requirements of buying at auction. So what options might be available to you?
What types of auction finance are available?
Short-term bridging loans
Bridging loans are a common way to finance a property at auction. They are useful if a mortgage lender refuses an application, or you simply need more time to arrange long-term auction finance.
If you are interested in a property where there is no functioning kitchen or bathroom, it is likely to be regarded as unmortgageable. This is where auction finance comes into its own, as you may be able to secure bridging finance of 6-24 months. This enables you to purchase and renovate the property within the loan term, and either mortgage it later or sell it on.
Bridging loan fees
Financiers charge a number of bridging loan fees in addition to the interest, and there are likely to be further fees if you use a broker. Lender fees can include:
- Arrangement fee
- Legal fees
- Administration fees
- The lender’s valuation fees if applicable
- Potentially an exit fee if you pay off the loan early
This makes bridging loans expensive, but given the speed with which financiers can make their lending decision, they facilitate a purchase at auction that may otherwise not be possible.
Interest rates for auction bridging finance
Interest rates for bridging loans are set according to the property’s condition and location, and on which property the loan is secured. This is generally the one being purchased at auction, but it can be other property owned by yourself.
When setting an interest rate, financiers calculate their risk of lending based on how easily the property would sell if you defaulted. They also look at the Loan to Value (LTV) and whether it would be a first charge on the property. Interest may be ‘rolled up’ so that you pay it at the end of the loan term rather than monthly.
Repaying bridging finance in the minimum time possible is a key part of reducing your costs. It is advisable to renovate the property quickly, or secure a mortgage as soon as is practical following purchase.
Buy-to-let mortgages are generally based on anticipated rental incomes, but lenders may also take into account your personal income. The majority of buy-to-let lenders will stipulate that rent needs to be 125% or more of the monthly mortgage repayment, and you may need to put down a deposit of around 25%.
Interest rates on buy-to-let auction finance are either variable or fixed, with variable rate deals potentially including tracker and discounted rates. You may also be able to choose between a repayment or interest-only mortgage for your auction purchase, but bear in mind that some lenders base the required monthly rental amount (generally around 125% as previously mentioned) on a repayment mortgage, even if you have taken out an interest-only deal.
Whether you are a seasoned auction investor, or you are purchasing a single property for your business operations, you may be able to secure a variable or fixed rate commercial repayment mortgage, or sometimes an interest-only deal.
Commercial mortgages are similar to residential mortgages in that the loan is secured on the property, which can be repossessed if you default on repayments. It is generally beneficial to pay as large a deposit as possible, as the interest charge on a commercial mortgage tends to be a little higher to cover the lender’s perceived risk.
If you would like more information on auction finance, and which option would best suit your goals, our experts are available to provide professional advice. Please contact one of the Eddisons team to arrange a consultation.
Written by: Paul Thompson on 29th June 2018