Using Bridging Loans For Auction Properties

Buying property at auction is a different process to buying property in any other way. Whilst auctions are an ideal way of buying properties below market-value, and often from highly motivated sellers, the speed of completion can cause complications for those without a large amount of liquid capital. 

Auctions require buyers to make a 10% deposit of the total sale price on the same day, which is often a substantial sum of money. The buyer becomes the legal owner of the property as soon as the hammer goes down and is required to complete the purchase within 28 days of their winning bid.

This means that you as the buyer have ready cash to complete the purchase within this tight timescale. If you don’t have the funds available, then you will typically finance your purchase using an auction bridging loan.

There are two types of auction process now in use, largely thanks to the rise in online auctions. These are known as the ‘traditional’ and ‘modern’ (or ‘conditional’) auction methods.

Traditional Auction Process

Traditional auctions follow the process described above. Property exchange happens immediately after the auction, when the buyer makes the 10% required deposit, and the buyer then has 28 days to complete on the property. 

Options for auction financing are often more limited when it comes to properties sold through the traditional method, as many of these are in a condition which would be regularly considered as ‘unmortgageable’.

Modern Auction Process

The modern auction process came about as online auctions became more popular. At the close of the auction, if their offer is accepted, the successful buyer does not have to put 10% down right away. 

Instead they must place a non-refundable reservation fee that secures the property. This fee varies from agent to agent but is usually worked out as a percentage of the final sale price.

The 10% deposit will then be paid on exchange, which must happen within 28 days of the auction, and the buyer is then given a further 28 days to complete their purchase. Although this offers a little more time from winning bid to completion, this still means that the buyer has only had 56 days to raise the full property price.

How Does Auction Finance Work?

Whilst buyers do have 28-56 days to get together the cash they need to pay for a property, this is significantly shorter than the amount of time a typical mortgage takes to process. 

Even if you are able to get a traditional mortgage completed before this time period is up, a 10% deposit is a considerable amount, being that most contemporary properties sell for sums well into six figures.

Auction finance loans are an easy way to arrange the funding you need in advance of the auction and allow you some breathing space whilst you apply for a long-term lending solution. They are a type of bridging loan that offer short-term funds of anywhere from £25k to £25m and can be arranged in a very short space of time.

The Auction Finance Process

Research

You will want to decide what sorts of properties you are looking for and find a specific auction to attend. After this it is important to find an auction finance broker for the properties you are interested in, as they can work on your behalf to approach suitable lenders with your proposal.

We offer auction finance UK wide up to £25m and with interest rates as low as 0.44%. We can approach over 100 lenders with your proposal and get approval typically within 24 hours. To see indicative rates of what your bridging loan will cost then please click here to use our handy bridging loan calculator.

Provisional Acceptance

The provisional approval process will vary from lender to lender, but usually includes things like property valuations, an assessment of your income and budget, and your exit strategy. 

A solid exit strategy can be key to getting the best interest rates and ensure that your application is approved. Using a broker such as us can help with this as we look over your proposals to see whether a lender is likely to approve then.

Choosing Targets

Conditional approval means that you now have the finances in place to make your payment if you win a property at auction. On top of this, it also gives you a better idea of what properties to bid on. 

The amount that your lender has given you approval for should be the top end of your budget, and you must not go over this during the auction. 

A lender may offer even more specificity in their lending criteria (£200,000 for a three-bed semi-detached property, for example). If you bid on anything outside this, then your auction financing agreement could be withdrawn.

Closing The Deal

With you auction finance arranged and after you have made a winning bid on a suitable property you will need to make the deposit on the same day. 

For a £200,000 property, this would mean that £20,000 needs to be paid there and then to secure the property. This 10% is taken out of the final balance, which becomes due in full 28 days later. 

The lender will then send the remaining £180,000 to you so that you can complete the purchase as quickly as possible. It is then up to you to secure longer-term finance or set your exit plan in motion in order to pay back the auction bridging loan within the agreed timescale.

What Is The Maximum Amount Of An Auction Finance Loan?

Property auction finance is typically capped to a loan to value (LTV) ratio of 70-75%. This means that lenders tend to favour borrowers that have a deposit of at least 30%-35% of the property’s value (taking interest into account).

In order to be sure of securing finance, it is helpful to have more cash to put in upfront, as the higher-risk the deal the less the required LTV is likely to be. 

It is possible to secure higher LTV agreements - even up to 100% - but these will usually have to be secured against other properties or assets. 

It is important that your application and proposed exit strategy are strong if you want a higher LTV loan, which is why it is best to work with a broker when using bridging loans for auction properties.

Securing The Best Auction Finance Rates

The best way to ensure that you will be able to secure the funding you need for the property you want, and enjoy favourable loan conditions, is to work with an expert.

We are a whole-market auction financing broker, working directly with lenders across a range of niches and specialities. 

We will make sure that your application is approved in as little time as possible - in most cases we are able to secure same-day agreements in principle.

Call us on 01202 612934 or get your auction bridging loan ball rolling with our Quick Enquiry form. 

Our friendly, professional team are here to give you unbiased advice that will help you to choose the right auction bridging loan for you.