Last Updated on 6th August 2020
With property prices constantly increasing, low auction guide prices can be very enticing. We’ve secured some great property deals for investors over the years and many of them using auction finance.
It’s important to note that just because a property is purchased at auction, doesn’t make it a great deal. If you’re considering purchasing an auction property, ensure you carry out the necessary due diligence. The last thing you want is to be stuck with an overpriced property riddled with faults.
It’s also important to stick to your budget at auctions. Emotions can run high, so it’s vital to keep an eye on the numbers. Nonetheless, this article is about auction finance and not auction tips, so we’ll get started!
What is auction finance?
Auction finance is a loan used to fund the purchase of an auction property.
But why use auction finance?
When purchasing a property at auction, you often have to complete the sale within 28 days. On the fall of the gavel, you’re exchanging contracts which are legally binding. You’ll also have to put down a non-refundable deposit there and then. As time is critical, auction finance can be ideal to secure the purchase until a more permanent form of finance can be secured, such as a mortgage.
Often enough, investors will have funds tied up in other projects and properties. As the purchase is limited to a certain time period, you may not be able to utilise your own funds in time. Rather than let a great deal pass you by, auction finance can allow you to secure it.
Finance for an auction property can be a buy to let mortgage, but it is typically a bridging loan. The finance is 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 finance can be arranged is the reason so many investors use it.
If you have a shortage of funds or can’t quite withdraw funds from other projects quickly enough, a loan can ‘bridge the gap’ to ensure the purchase runs smoothly. 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.
What can auction finance be used for?
Auction finance can be used to fund residential, commercial and mixed-use properties and even land. Mortgages are often only offered on properties with standard construction, whereas auction lenders will consider a wider range of property types. If the property was mixed-use for instance, then the only mortgage suitable would be a semi-commercial mortgage. Learn more about semi-commercial mortgages here.
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.
If you have the funds in place for a deposit and also have time on your side, then a buy to let mortgage may be sufficient. As long as the property is eligible for a mortgage (standard construction, not too run down), then this may be a more viable option. This is because mortgage rates are often lower than rates for finance. Ensure your broker and lender are aware of the time frames involved before making any financial commitments.
How does auction finance work?
Although finance tends to be faster than traditional routes such as mortgages, you still need to prepare. Going into an auction room and then trying to secure finance within 28 days is possible, but not advised. This is simply a risk you don’t need to take and can be avoided by planning beforehand.
Having finance in place before the auction gives you a budget to work towards and the confidence to bid. Lenders also have time to evaluate your proposed purchase. This is something that every lender will need to do before giving you the green light.
Presenting your property to the lender
Once you’ve found an auction property that you want to purchase, you 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 the property to the right lenders is key to ensure the chances of approval are maximised.
Applying for finance
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. Again, an advisor can check your individual circumstances to give you a more informed answer.
Once a 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. Depending on the available finance, this will give you a budget that you need to stick to. 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 (remaining 10%). 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 28 days to complete the deal. A deposit of 10% is usually taken on the day, however this can be more depending on the terms of sale. Once your lender has been informed, the funds will be released directly to the solicitors acting for the vendor on the day of completion.
Auction finance rates
The rates for auction finance will be the same as rates for bridging loans. Bridging loan rates are a lot higher than traditional routes such as mortgages. Auction finance is designed to be short term, so as long as the deal makes financial sense, the rates aren’t usually enough to put investors off. As rates are constantly changing, you can make an enquiry to check the latest rates available.
If you’re looking to use a mortgage to fund an auction property, then the rates should be no different from that of a regular mortgage. Our advisors also specialise in fast-track mortgages which can be suitable for auction purchases.
Having a specialist by your side can make all the difference in securing the property you’re after. Our advisors specialise in this field and can:
- Ensure your application is presented in the best manner
- Apply to lenders 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.