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Auction finance

Last updated on 9th December 2023 by Martin Alexander

Buying a property at an auction involves meeting deadlines and paying a deposit on the day your bid is accepted. Mortgages are rarely suitable due to an average application taking four weeks. However, auction finance can be approved much faster and is often the favoured method of buying property at an auction.

What is auction finance?

Auction finance is a bridging loan used for buying property at auction due to its fast approval times.

Most property auctions require buyers to complete purchases within 28 days. Contracts are legally exchanged when the auctioneer’s hammer falls, and you’d pay a 10% deposit the same day.

The speed at which auction finance can be approved is why so many investors use it rather than a mortgage when buying at auction.

How does auction finance work?

Auction finance works as a short-term, interest-only loan. Applications typically take between 7 and 14 days and are approved much faster than mortgages. You’ll need security for the loan, such as a deposit or equity in a property.

Having an exit strategy to repay the loan is also crucial. Most auction buyers will remortgage or sell the property to repay the loan. Quite often, properties sold at auction aren’t suitable for mortgages due to their condition, whereas auction finance typically is.

Most lenders expect auction finance to be repaid within 12-24 months. Getting funding secured in advance is ideal, as you can bid with confidence and stick to a budget.

How much deposit will I need?

You’ll need a 10% deposit to buy an auction property. The remaining 90% is typically paid within 28 days, which is what auction finance can fund.

What interest rates can I expect?

Interest rates for auction finance are typically higher than mortgage rates, starting from 0.45%-1% per month, depending on your deal. However, you’d repay it much sooner than a mortgage, so lenders charge slightly more to make it worth lending.

You can get better rates by using a bigger deposit and having a credible application, such as a good credit score.

Lenders typically charge interest in three different ways:

  • Monthly – Interest is repaid monthly, with the total loan repaid at the end of the term, similar to how a buy to let mortgage works.
  • Rolled up – Interest isn’t paid monthly but is added to the loan and repaid in full at the end of the term.
  • Retained – Interest is added to the loan amount and repaid in full at the end of the term. The amount, including interest, is calculated at the start of the term.

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 suitable for auction purchases.

Read more about fast mortgage approvals here.

What types of property can I buy with auction finance?

You can use auction finance to buy the following property types:

  • Residential
  • Buy-to-let
  • Commercial
  • Mixed-use properties and semi-commercial
  • HMO and multi-lets
  • Plot of land
  • Unmortgageable properties

Mortgages are typically approved on properties with standard construction, whereas bridging lenders will consider various property types. If the property was mixed-use, 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.

Eligibility and criteria

To determine your eligibility for auction finance, you’ll be assessed on the following criteria:

  • Credit history – Having a good credit score can boost your chances of getting finance for an auction, but having bad credit can make things difficult.
  • Deposit amount – Having a larger deposit amount can unlock better rates. If you fall short in your application, a bigger deposit may be enough to gain approval.
  • Property investment experience – Seasoned property investors typically find it easier to get auction finance than those with less experience. That said, it’s still possible for first-time buyers to be accepted, given the rest of their application is suitable.
  • Exit strategy – Your lender will require an exit strategy on how you plan to repay the loan. Evidence that the property you’re buying is profitable enough to repay the loan can support your application.

Will I need an advisor to buy an auction property?

An experienced advisor can help you by speaking to multiple lenders on your behalf to secure you the best possible deal. We’ll also explain the process to ensure enough time between your application and auction dates.

Each lender also varies in the types of properties they’ll consider for auction finance. Criteria across lenders differ, so we’ll assess your circumstances before finding suitable lenders. Trying to do this yourself with the time constraints of an auction can be challenging.

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.

Frequently asked questions

If you have a deposit and time on your side, then a buy-to-let mortgage may be sufficient.

If the property is eligible for a mortgage, it may be a better option, as interest rates are often lower than rates for bridging loans. Ensure your broker and lender understand the time frames involved before making financial commitments.

You can get a 100% loan so that you wouldn’t need a cash deposit. However, you would need to offer security, such as a property for collateral. This can be a high risk as failing to repay the loan can result in losing your home.

Lenders typically give you 12-24 months to repay a bridging loan for auction. You could ask for an extension if you fail to meet the deadline, but it’s not always guaranteed, and you’d typically need a new application. You’re also likely to pay higher interest rates if given an extension.

About the author

Martin Alexander
Senior Mortgage Advisor

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

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