Have you ever wondered how you finance an auction property?
Whether you’re looking at auction residential or commercial properties, once that gavel goes down in the auction house you need to know how you’re going to finance your purchase.
Contrary to any beliefs you might have, you don’t need to be a cash buyer at a house auction. There are ways to secure finance should you bid on a property.
In this article, we want to give you a clearer picture of the ways and means to obtain auction finance and how it works.
What is auction finance?
As we’ve said, you don’t need to be a cash buyer to bid at a property auction. You’d be surprised to find that there are plenty of options out there to finance auction house purchases.
If you’re looking at how to finance an auction property, lenders may use another term for auction finance, a bridging loan.
A bridging loan temporarily ‘bridges the gap’ between the purchase of property and securing long term funds for that property.
Time is limited when you purchase at auction, and long-term forms of borrowing can be harder to arrange within such tight deadlines. A mortgage application won’t normally be turned around quickly enough so the need for something with a quick processing time is where a bridging loan comes in.
Arranging auction finance and receiving a conditional offer could be turned around within days.
However, although the criteria of these loans can be more flexible, this type of finance is only a short term stop gap, usually with limits of between 12-24 months. It will also come with high-interest rates and the need for a solid exit plan.
How does auction finance work?
Before you consider purchasing at auction, it’s paramount that you assess and decide what your budget is and the limit of your bids.
If you’re planning to attend and bid on an auction property there is no requirement to have your finance sorted and in place before the event.
What you do need is a minimum of 10% of the highest bid you’re willing to make. Why? Because if your bid is the winning bid, you’ll need a deposit of the final purchase price to pay the auction house.
From there, how long you have to pay off the auction house depends on them, but it’s usually around 28 days.
So how do you secure finance within those 28 days?
Because the timeframes are so restricted, applying for a conventional mortgage could take too long to put in place and be far less flexible.
Seeking and securing a short-term loan in the form of auction finance is where you’ll need to start.
Lenders will all have their own criteria which you’ll need to meet when applying for auction finance. It means that applications are assessed on a case by case basis, however, they will generally all require the following:
- You’ll need to present the property to the lender. Depending on the type of property and its condition, certain lenders may be better suited.
- A valuation of the property will take place.
- You’ll undergo the usual affordability and credit checks.
- You’ll need to present an exit strategy for the end of the loan term.
Once you’ve secured finance and the property your lenders will release funds directly to the solicitors acting on behalf of the vendor to complete the purchase.
From there, depending on your terms you’ll have a specific timeframe in which to secure long term finance for the property i.e. remortgaging.
How much can I borrow?
The amount you can borrow will vary from lender to lender and be dependent on their criteria.
As a general rule auction finance is capped at a 70-75% loan to value (LTV) ratio for straightforward applications. Those with higher risk applications may see the ratio drop to between 50-60%.
You’ll therefore need a deposit of at least 30%.
This doesn’t mean that there aren’t lenders out there offering a better ratio. This is where speaking to a whole of market broker can be valuable.
However, be aware that the amount your lender will loan may not always fund the whole of the deal, which is why you need to have a budget in mind before going to auction.
What happens if you buy at auction but can’t get finance?
Once that gavel goes down you enter a legally binding contract and will be expected to place at least a 10% deposit down on your purchase. From there you’ll be given 28 days in which to secure finance for the property. Failure to do so within the set timeframe will mean that as well as losing the property you’ll lose your deposit.
Are there any restrictions on the type of property you can buy with auction finance?
There’s a variety of properties out there be it, residential, commercial, mixed-use or unmortgageable/uninhabitable. Auction finance tends to be flexible and can have very few restrictions around the type of property you want to purchase.
Looking a little more closely at it the following information can help give you an idea:
Residential – If you’re looking at residential properties you’re planning to live in, it’s important you look for a regulated lender (regulated by the Financial Conduct Authority).
Applying for auction finance instead of a residential mortgage may be your best option as a mortgage application can take longer to approve and you don’t want to miss out on any great deals or lose out because of time restrictions.
Generally, your exit strategy would be a residential remortgage or the sale of your existing home.
Commercial – With commercial or mixed-use properties, some lenders may have restrictions placed on the type of use because of its high-risk nature i.e. restaurants.
As it’s business use, they may also ask for a business plan to assess the viability of the investment.
The good news is that if you’re a Limited Company there are auction finance loans out there for you too.
Unmortgageable/Uninhabitable – These properties can cause problems if applying for a mortgage but, with the flexible nature of auction finance, it’s possible to obtain a loan.
Applications with experience in property may help your application they may even be willing to offer you the funding for any renovation works.
Your exit strategy for this type of property could be a remortgage or it’s sale.
Property prices are increasing so auction properties can be appealing especially with the right deal. However, just because a property is bought at auction doesn’t make it the best deal. Only when you stick to a budget and carry out your due diligence can you get the best deal that’s right for you.
If you’re bidding at auction without finance there is a risk you could lose the property as well as the 10% deposit. Speaking to a specialist to get advice first can minimise the risk and offer access to whole of market lenders.