Funding the purchase of a property at auction

There are big differences between buying an auction property and buying on the open market. The process is straightforward and fast, with the highest bidder on auction day securing the property. And from that point, you typically have just 28 days to complete the deal.

The speed of the process and the opportunity to bag a bargain can make auctions appealing to all sorts of buyers, but it’s also a high-risk strategy. If you can’t pay the balance on time, you could lose your 10% deposit and any money you’ve spent on surveys and solicitor’s fees.

You may also have to cover the cost of reselling the property and potentially pay interest for every day it remains unsold. That’s why it’s so important to understand your financing options and have funding in place before the auction begins.

What are your auction property finance options?

If you’ve seen a property that you want to bid on at auction and you’re not in a position to buy in cash, you need to think carefully about your finance options. Of course, there’s every chance that you might be outbid on the day, but you still need to have everything ready to go.

 These are your three main funding options: 

• Mortgage - One option is to buy an auction property using a mortgage. You’ll need to get a decision in principle, also known as an agreement in principle, before the auction day. This will give you a clear idea of how much you can bid and prove that you’re in a position to purchase the property.
• Bridging loan - A bridging loan is a short-term loan that can give you access to the funds you need to complete the purchase quickly. Bridging loans tend to be more expensive than mortgages, which is why this should be treated as a short-term solution to ‘bridge the gap’ until you can put long-term finance, like a mortgage, in place.
• Auction finance - Auction finance is a specific type of bridging loan designed for the specific purchase of buying property at auction. It’s very flexible, can be arranged quickly and is tailored to your needs. Depending on your position, you can use auction finance to cover the deposit, the balance or the entire purchase price.

Is a mortgage the best option?

That depends on the specifics of your situation. The cheapest way to finance an auction property is with a mortgage. That’s because you’re likely to receive a far lower rate of interest on a mortgage than on a bridging loan. However, mortgages are also far less flexible and may not meet the particular requirements of your purchase.

 One common problem for auction buyers is that mortgages are only available on properties that meet certain requirements. For example, if there’s a lot of renovation work to do or the property doesn’t have a functioning kitchen or bathroom, it’s unlikely that you’ll be able to get a mortgage. You may have similar problems with issues such as wet or dry rot and Japanese Knotweed.

 You could also find that, even with a decision in principle, the funds cannot be released and processed in time. In that case, using fast, short-term finance such as a bridging loan could help to keep the purchase on track. 

When might you use a bridging loan or auction finance?

If the property you want to buy is in an unmortgageable state, a bridging loan or auction finance is likely to be your best option. This type of deal will give you access to the funds you need quickly, potentially within just seven to 10 days. Once the property is deemed habitable, you can then take out a mortgage and repay the bridging loan.

You also need to think about your exit route. This type of finance attracts higher interest rates and is only intended for short-term use. Therefore, you should always have a plan to repay the loan and switch to a longer-term form of finance as quickly as you can.   

Don’t let a great deal pass you by

The most important lesson is that property auctions are not just for cash buyers. If you see a property that you like the look of, whether as an investor or an owner occupier, there are funding options that can work for you. And if you’re not sure which is the best route to take in your circumstances, it’s worth seeking professional and independent advice.

Article written by Sharon McDougall of Scotland Debt Solutions, part of Begbies Traynor Group. Sharon is a DAS-approved Money Adviser with vast experience in providing debt advisory support to individuals in Scotland.