Written by: Paul Thompson on 23rd March 2022
Purchasing a property at auction offers many benefits, but the financing rules differ from 'standard' purchases. This is because the legal timeframe for buying is shorter. This means you need to have your property finance arranged before auction day. And you must be able to provide proof of a finance lender's agreement in principle before bidding to purchase property at auction.
When you are the winning bidder at a property auction, a non-refundable deposit is paid straight away. The balance of the property is then due within 28 days of purchase. Failing to meet these stringent auction requirements means the loss of your deposit and a possible claim for damages by the seller. This is why you must secure your arrangement with your auction finance lender well in advance of auction day.
Short-term finance options such as bridging loans are a common type of auction finance due to their flexibility. Auction bridging loans are usually a generally quick lending decision by financiers so ideal if you want to make a quick purchase. So, let us have a look at how specialist auction finance works.
Each lender carries out their own due diligence process where they assess your financial situation. If all is well, they provisionally approve your application. A lender's due diligence may include a check on your income and your credit report. As well as valuing the auction properties mentioned in your application.
Auction finance does need to be flexible given the legal conditions in which you are purchasing. This is why specialist lenders exist that meet the specific requirements of buying at auction. So, what options might be available to you?
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.
For example, if you are interested in a property where there is no functioning kitchen or bathroom, it is likely to be regarded as unsuitable for a mortgage. 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. If you're a property developer or investor this is often a preferable way of securing auction finance.
Financiers charge a number of residential and commercial 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:
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 bridging loans are set according to the property's condition and location, and on which auction 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 a bridge loan in the minimum time possible is a key part of reducing your costs and avoiding bad credit. 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. This finance type applies to residential property that is being bought at auction with the intent to rent to tenants. 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 property 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 commercial 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 auction 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 or mortgage advice, our experts are available to provide professional help. Please contact our partners at Eddisons to arrange a consultation.
Written by: Paul Thompson on 23rd March 2022
Paul has over 34 years’ experience of the property industry including 14 years experience of running one of the countries most successful commercial and residential property auction houses as a Director, Auctioneer and formerly 100% shareholder.
Paul is a Chartered Surveyor and member of the National Association of Valuers and Auctioneers (NAVA).
