Auction finance is simply another term for bridging loans or short-term finance. In this context the finance is used to purchase properties bought at auction, where there is usually only 28 days to
complete the transaction after paying a 10% non-refundable deposit.
Auction finance is a flexible way to raise money, with many benefits over a traditional mortgage when it comes to purchasing at auction. Some short-term finance lenders even have teams specifically setup to arrange auction finance deals.
What are the benefits
The main benefit is the speed in which the finance can be arranged if it goes smoothly with the valuation and solicitors it can be as quick a few working days.
The loan available is typically up to 75% of open market value or purchase price whichever is lower.
Lenders will consider properties in poor condition if the monies will be used towards refurbing the property or a viable exit route is demonstrated.
Finance is available over shorter terms between 3 and 24months with no exit fees.
What types of property at auction
Residential: when buying a property to be lived in and either refinance, or renovate and then refinance at a later stage.
Buy to Let: buying a property that will be let out, to either refinance or renovate and then refinance at a later stage. Some lenders require a property to be owned a minimum of 6 months before
Commercial: for the purchase of offices, industrial units, shops, warehouses etc.
Refurbishment: these properties are usually in poor condition and may require work before a term mortgage lender will lend on them. Work will be carried and usually an increase in value will occur allowing the property to be refinanced on a term loan or sold on at the new value.
Buying at auction might mean you find a property at below market value in need of refurbishment, auction finance or bridging loans can be a smart way to fund the project.
Whether a lender will also fund the refurbishment costs too depends on the experience of the developer. From a lenders perspective they would want to see a track record of successful projects
as this would indicate lower risk.
Before the Auction
Do your research and have a shortlist of properties you are interested in. Once they are decided set a budget and stick to it, it is easy to get carried away at the auction.
Once you have shortlist speak to your mortgage broker and go through practicality of your proposal for finance. Then find a solicitor who is familiar with auction finance and get quoted.
Working with a broker
When you speak to a mortgage broker they will have access to the bridging lenders in the market. They should be able to advise you, before the auction:
– The amount of money that would be available to borrow
– Whether the type of property is suitable
– Viable exit strategies
– An idea of the costs involved
– How a lender will view your previous experience
What are the costs
Short term finance does come at premium, with rates usually starting at 0.75% per month and arrangement fees of between 1-2% depending on the lender.
Valuation costs are similar to a term mortgage, with the fee on a scaled based on the property value.
Solicitors costs are usually at a standard rate, but we recommend speaking to a solicitor who is familiar with short term finance/ bridging loans and recognises the timeframe you will be working to.
After the Auction Finance
Depending on your plans for the property you may either be looking at:
– Residential mortgage
– Buy to let mortgage
– Commercial mortgage
– To sell the property.
If you are looking to refinance the property onto a traditional term mortgage it is important to give yourself time to arrange this, before the short term finance expires.
Your property may be repossessed if you do not keep up repayments on your mortgage.