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Auction finance

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Auction finance

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Last reviewed on 7th April 2022

If you’re bidding for a property at an upcoming auction, arranging auction finance beforehand is recommended. Being prepared allows you to bid with confidence with a clear budget in mind.

Key features of auction finance include:

  • Up to 100% LTV
  • Range of investment products
  • Terms from 1 month
  • Bad credit applicants considered
  • Lending to SPV limited companies and individuals
  • 1st and 2nd charge loans
  • Loans in excess of £100m
  • Covering England, Scotland and Wales

What is auction finance?

Auction finance is a type of bridging loan or short term finance used for buying property at auction. This can be ideal for auction, as it can be provided very fast to meet an auctioneer’s requirements.

Many auction houses require property buyers to complete the purchase within 14 or 28 days. On the fall of the gavel, you’re exchanging contracts that are legally binding and therefore have to meet these timeframes.

The loan can be used to fund your deposit, the balance, or the entire auction purchase itself. The flexibility of a loan can cater to a number of deals. More importantly, the speed at which the finance can be arranged is the reason so many investors use this type of loan.

Will I still have to pay a deposit?

You’ll have to pay a non-refundable deposit on the day of the auction if you’re the highest bidder. As time is a factor, auction finance can be used to buy the property until a more permanent form of finance can be secured, such as a mortgage.

Should I use auction finance?

Bridging loans are a form of commercial finance and should only be used in certain circumstances. For instance, purchasing a property at auction with limited access to funds is a common scenario where a bridging loan would be ideal.

As auction buying is limited to a certain time period, you may not be able to access your own funds in time. Rather than let a great deal pass you by, auction finance can allow you to buy the property. If you have a shortage of capital, a loan can help you to ‘bridge the gap’, ensuring the purchase runs smoothly.

What is auction finance used for?

Auction finance can be used to fund the following property types:

  • Residential
  • Commercial
  • Mixed-use properties and semi-commercial
  • HMO and multi-lets
  • Plot of land
  • Uninhabitable and rundown homes
  • Unmortgageable properties

Mortgages are typically approved on properties with standard construction, whereas auction lenders will consider a wider range of property types. If the property was mixed-use for instance, you could consider a semi-commercial mortgage.

Auction finance can still be used for mixed-use properties, saving precious time. This versatility allows investors to secure deals they otherwise wouldn’t be able to do.

Are buy to let mortgages suitable for auction?

If you have a deposit and also have time on your side, then a buy to let mortgage may be sufficient. Furthermore, if the property is eligible for a mortgage, then this may be a more viable option. This is because mortgage rates are often lower than rates for bridging loans. Ensure your broker and lender are aware of the time frames involved before making any financial commitments.

ask a mortgage broker

How does auction finance work?

Although finance tends to be faster than traditional routes such as mortgages, you’ll still need to prepare before making any bids.

Auction finance usually works in the following way:

  • Selecting a lender
  • Due diligence on the proposed property you’re buying
  • Pre-approval or provisional acceptance
  • Winning the auction

Finding finance after having a bid accepted is possible, but not advised. This is simply a risk you don’t need to take and can be avoided by planning beforehand. Lenders also have time to evaluate your proposed purchase and you’ll have more time to find the best deals possible.

Pre-approval

Once you’ve found an auction property that you want to purchase, you’ll need to present this to lenders. Depending on the property, certain lenders may be better suited. Our specialist mortgage brokers can guide you through this.

Presenting your application to the right lenders is crucial in getting your proposal approved.

How to start an application

Once a lender is happy with the property and you’re happy with their terms, an assessment will begin. The assessment is similar to a mortgage and will involve a valuation of the property, affordability checks, and credit checks.

If you have bad credit, you may still be eligible, so don’t let this put you off. We can check your individual circumstances to give you a more informed answer.

Once a commercial lender approves the finance you’ve applied for, it’s important to calculate your maximum property budget. The finance available may only fund part of the deal, or just the deposit and not the balance and so on. The loan you’ve qualified for will give you a budget that you need to follow.

See the example below:

If the lender agrees to fund 90% of the property up to a value of £100k, then you’d need to pay a deposit of £10k yourself.

Using this example, you’d know your budget is £100,000. Depending on the lender, there may be more or less flexibility in the finance offered, but your lender or advisor will make this clear to you.

Completing the purchase

Once you’ve secured a bid on a property, you’ll have 14 or 28 days to complete the deal.

A deposit of 10% is usually taken on the day, but this can be more depending on the terms of the sale. Once your lender has been informed, the funds will be released directly to the solicitors acting for the vendor.

Auction finance rates

Rates for auction finance and bridging loans are pretty much identical.

Bridging loans can be more expensive than traditional routes such as mortgages. This is because they are designed to be short-term, so as long as the deal makes financial sense, the rates aren’t usually enough to put investors off.

Rates typically start from 0.5% per month and can go up to 3%, depending on the deal you’ve selected.

If you’re hoping to use a mortgage to fund an auction property, then the rates should be no different from a regular mortgage. Our advisors also specialise in fast-track mortgages which can be suitable for auction purchases.

Read more about fast mortgage approvals here.

Will I need a mortgage advisor to buy an auction property?

An advisor can make all the difference in making your auction purchase a success and can help you with the following:

  • Ensure your application is presented in the best manner
  • Apply only with lenders that are suitable to your circumstances
  • Search the entire market for the best rates available
  • Communicate with the lender on when the funds need to be released
  • Liaise with the solicitors in your purchase, regarding the financial side of the deal

You can make an enquiry now or simply ask our experts a question. You can also call us on 0800 195 0490 to get started.

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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.

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