Auction Finance
Are you looking for a bridging loan to buy a property, land or other investment at auction? You’ve come to the right place. In this comprehensive guide to auction finance we’ll take a detailed look at everything you need to know to help your auction purchase go smoothly, from how it will work on the day to how to make sure you get the money to meet the payment deadline.
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What’s in this article
We’ll also look at the specifics of auction bridging loans, including how to apply, how interest calculations work and how using an auction finance broker can help you get the best deal and save you a lot of time and stress.
What is auction finance?
Auction finance, as you might have guessed from the name, is a particular type of finance specifically for buying property or land at auction.
It’s a form of bridging loan, so is only a short-term funding solution - you’ll need to have a longer term plan for your purchase, normally either reselling it or refinancing with another form of borrowing, often a mortgage.
Auction finance typically runs for up to 12 months, although it can be as long as 24 or 36 months. Be warned though that interest does stack up, so it makes more financial sense to have this kind of bridging loan for as short a period as possible.
Lending is on an interest only basis, meaning you don’t repay any capital until the end of the term. Interest can be paid monthly or at the end, depending on whether you want or even have the financial flexibility to make payments on a monthly basis.
What can you use it for?
There are two main reasons for wanting to use an auction bridging loan to fund a purchase at auction. The first issue is one of time.
Unless you’re a cash buyer, you’ll need some way to finance your property and a traditional mortgage simply isn’t quick enough to arrange. Buying at auction involves quick decisions and short turnaround times, and standard mortgages are definitely not designed with speed and flexibility in mind! Auction finance on the other hand can be arranged in a couple of weeks, sometimes even a few days, and so it’s perfect for the strict timescales involved in buying at auction.
The other key benefit of auction finance is flexibility. Because auction bridging loans are generally unregulated, lenders can make each decision much more on a case by case basis rather than having to perform a tick box exercise that could discount many people from being eligible to borrow. Auction finance can also be used in a much broader range of circumstances, giving you flexibility over the type of property you want to buy and its condition.
Some of the circumstances where you might want to use auction finance include, but are certainly not limited to:
- Buying a home for you and your family to live in as your main residence
- Buying a property to renovate and resell, sometimes known as ‘flipping’
- Investing in a home to rent out
- Purchasing land either as an investment, to resell or to build a home on
- Buying an uninhabitable property for redevelopment
- Investment in a HMO residence or apartment building
- Buying a commercial property such as a pub, retail unit or warehouse
- Semi-commercial property investment such as a retail unit with flats above
The type of purchase will influence your exit strategy. For example, if you’re buying a property to do up and rent out, you will probably be planning to refinance it with a buy-to-let mortgage as soon as you can. If you are a property developer looking to do some refurbishments and resell for a quick profit, your plan will be to pay off the auction bridging loan when you sell.
Auction finance can in theory be used for any legal purchase, so it could be used for buying something like a vintage car. However, it may not always be the most appropriate form of lending, so make sure to talk to a broker about alternatives.
How much does it cost?
Let’s not beat around the bush here, auction finance isn’t a cheap form of borrowing.
You’re not paying low interest rates on any kind of bridging finance, including auction loans. You pay a premium for the fact that auction finance can be arranged so quickly and that it can be used for a wider range of purposes than a traditional mortgage.
Auction finance is always made on an interest-only basis. What this means is that you don’t have to pay back any of the capital amount of the loan until the end of the term. The interest however can be paid back in a few different ways.
The cheapest way overall is to use the serviced interest model, which is how traditional interest only mortgages work. Every month you pay a flat amount of interest, leaving the capital amount repayable the same over the course of the loan. When you’re getting any kind of bridging finance however, cashflow may not always be so readily available, so you may prefer to use an interest repayment model that doesn’t require any regular repayments at all. There are two options for this - retained interest and rolled up interest.
Retained interest, sometimes referred to as ‘deducted interest’, is calculated at the beginning of the loan, and paid either by deducting it from the loan amount or adding it on. This sounds a little confusing, but it’s essentially the same thing, it’s just about how you set it out in your mind. If you have a maximum amount that you can afford to pay back then you might specify that as the loan amount and deduct the interest. If you have an amount you need to have in the bank after interest, you might specify that and pay the interest on top.
If you end up settling the loan earlier than you expected and have overpaid the interest, you will be rebated the difference.
Rolled up interest does what it says on the tin - every month the interest due gets rolled up and added to the balance of the loan. The next month, you’ll not only pay interest on the original capital amount but also on all interest accrued to date. The compounding element of this model means you end up paying more overall when you roll up the interest than if you pay the interest every month.
A specialist auction finance broker will be able to advise you on which repayment method works best for you. Although you might want to go for the cheapest for example, that may not be the most practical, plus the compound effect of rolled up interest will vary depending on the interest rate you secure and the period over which you are borrowing.
So how much can you expect to pay in terms of interest on an auction loan? We looked at a few auction finance lenders to get some example rates at the time of writing (April 23). It’s also interesting to note that while standard mortgage rates are advertised as annual rates, auction loan rates are typically advertised as monthly rates. This can make it harder to compare auction mortgages with regular mortgages, so keep this in mind when you’re exploring your options.
At the time of writing, the following rates were available:
- Together Finance rates on auction finance rates start from 0.9%
- ABC Finance Limited has rates starting from 0.39% up to 85% maximum LTV
- MT Finance can go up to 70% LTV with rates starting from 0.75%
Remember that these rates will be a starting point for lenders and you may be offered a different rate depending on your financial and other circumstances and how much you’re looking to borrow.
How a broker can help
You may be familiar with the idea of using a mortgage broker to help you secure the best rates on a traditional residential or buy-to-let mortgage but did you know that you can also use a broker to help you find the best auction finance?
In fact, it’s very much recommended that you do use a broker when you’re looking for any kind of bridging loan, including auction loans, as these can often be more difficult to find and compare than standard mortgages.
The types of lender willing to offer auction finance are not the normal high street banks and building societies, they are more specialist lenders with a more open-minded approach to risk and a more flexible and individual assessment process. Using a broker with experience in the auction finance market means you don’t have to spend hours and hours trying to find these niche lenders online or compare what are often significantly different rates and terms. A broker will have access to the whole of the market as a default position, and will quite likely have existing working relationships with many lenders.
How to buy a property at auction with a bridging loan
Even though an auction can feel like an unpredictable way to buy a house, that doesn't mean you can’t plan ahead or that you shouldn’t get your finances set up in advance.
While it is potentially possible to win a property and auction with no finance in place because of the short arrangement times, it makes sense not to take that chance, but to instead put the work in in advance.
So what does the auction finance process look like and what should you expect at each stage? Let’s break it down into a few key steps:
Get your paperwork in order
Speed is of the essence when it comes to auction finance so it makes sense to get as much of the preparation done beforehand as you can. This will include making sure you’ve got up to date financial information readily available including bank statements, payslips or accounts, and that you’ve made a plan for a viable exit strategy. Working through all of this with a broker will help you understand how much you might be able to borrow, and help to guide your choices when it comes to creating a property shortlist.
Think about what you want to buy
The first step should be to firm up an idea of exactly what you want to buy and for what purpose. The size and type of property will of course go a long way to determining not only your budget, but the type of auction you’ll need to attend. At this stage you may want to draw up a shortlist of suitable properties at upcoming auctions and think about viewings. You’ll also need to consider how you’ll pay the deposit. The auctioneer will require a 10% deposit, payable on the day as soon as you make the winning bid. Do you have the cash to cover this or will it need to form part of your auction loan?
Get pre-approval in place
The next step in the auction finance process should be to hand over to an auction loan broker your requirements and financial information about yourself, and for them to assess which lender will be right for you. They can then go directly to the lender and negotiate a deal on your behalf. At this stage you’ll be looking for a conditional acceptance. This provisional offer will likely have an element of flexibility within it to allow you to be responsive at auction. For example your lender may have agreed to fund the purchase of a four or five bedroom home, priced between £300,000 and £350,000. This helps you to stay focussed on your needs but to still have an element of flexibility for auction time.
At this stage you can also have surveys and valuations done on your shortlisted properties. Having as much information as possible is the best course of action when going into an auction scenario - you don’t want to spend out hundreds of thousands of pounds only to discover the property is overgrown with Japanese knotweed.
Place the winning big
This makes it sound easy, but it’s not always that straightforward to win the property you want at auction. If you have got that far then congratulations, you’ve done it! As soon as the hammer falls you have entered into a legally binding contract and are committing yourself to paying for the property in full. In the first instance you have to pay a deposit of 10% of the sale price as a deposit on the same day. You will then usually have 28 days to pay the remainder of the balance in full and own the property. Do double check this payment window as they can sometimes vary and you may find you have more (or less) time than you first thought.
Finalise the purchase
Once you’ve won the property you wanted and paid the deposit, it’s time to push through the finance and get the balance paid off. Timescales are tight at this stage, so it pays to use a broker who’s good at keeping things moving quickly and efficiently. A broker will also be able to help you decide how you want to repay the interest and what product features are most important to you.
Repay the auction loan
This is the most important step in the whole process. Your auction loan will be secured on your property, so if you fail to repay it within the agreed timescales then you risk your property being repossessed and sold to repay the loan. Depending on what you bought the property for, you’ll most likely be able to repay the loan either once you’ve resold the property or when you’ve got other finance in place, usually in the form of a standard residential or buy-to-let mortgage.
Eligibility criteria for auction finance
While auction finance can certainly be more flexible than a standard mortgage, with applications assessed on a case by case basis, that doesn’t mean that lenders won’t want to thoroughly research who it is they might be lending money to.
They’ll want to look at a whole range of factors to assess your reliability and get an idea of whether or not you’ll be able to repay the loan at the end of the term.
Let’s take a look at some of the factors that may influence your chances of getting an auction loan.
Are you an experienced investor?
Lending is all about risk and one way that auction finance lenders assess risk is to ask whether or not you’ve bought property at auction before or whether this is your first time. If you’re an experienced investor with a strong track record of buying at auction then your chances of getting the auction loan you need are likely to be higher than if you’re a first time novice.
Exit strategy
This one is key as this is where your ability to repay the loan ultimately lies. Without a sound and clear plan in place for how you’re going to pay the money back, you’re unlikely to find a lender who wants to agree to a loan. An exit strategy doesn’t have to be complicated - often it’s simply that you plan to sell the property after some refurbishment or will be refinancing.
Age
Unlike with regular mortgages, age isn’t normally a factor with auction finance, as you are only going to be holding the loan over a short period of time and not the 20-30 years you might expect with a mortgage. Most auction finance lenders don’t therefore enforce a maximum age limit on applicants.
Property value
Asking for a loan to fund a property purchase in the region of £100,000 is going to be a very different proposition to applying for a £1,000,000 loan. The higher the amount you’re looking to borrow, the more risk there is involved for the lender and so the more thorough and cautious they could be. Linked to the property value closely is the amount you’re looking to borrow as a proportion of value - the loan-the-value ratio or LTV.
LTV
Auction finance lenders will normally apply a maximum LTV limit on auction loans, to allow a buffer for any fall in value and associated costs should they have to repossess and sell the property to cover the loan in the event that you fail to repay it. The lower the LTV - i.e. the more money you are able to contribute yourself - the lower risk you’ll represent and so the higher your chances of having your loan accepted. That said, having a high LTV or even needing a 100% LTV auction loan needn’t be a deal breaker in itself if you have other assets you can use as security.
Credit history
While much of the assessment of your ability to repay your loan will depend on your exit strategy and the property’s potential, lenders will still want to take a look at your credit record. Your credit history shows any recent incidents of poor credit management including late or missed payments, CCJs defaults and even repossessions or bankruptcy. Although having bad credit won’t automatically preclude you from being able to get any kind of auction finance, it may make it more difficult and could restrict your pool of potential lenders.
The important thing with any history of bad credit is to face problems head on. Don’t be fooled into thinking that by ignoring it you might be able to get away with not mentioning it - everything on your credit reports will be visible to lenders when they run their credit checks and if you’ve not been honest about issues then you’re more likely to have your application declined.
The best thing to do is to get copies of your credit report before you start and share these with your broker. THey’ll be able to assess the potential impact on your application and, if they think it's necessary, change the lenders they approach to prioritise those with a more inclusive attitude to bad credit.
Property type and condition
This is another factor that could be an indication of risk for lenders, and is something that could impact your exit strategy and your ability to either resell or refinance further down the line. For example, many mortgage lenders are cautious about offering mortgages on properties of non-standard construction such as timber or steel framed homes, thatched properties or high rise flats. If you’re buying a property like this at auction planning in the medium term to get a traditional mortgage in place, auction finance lenders might be sceptical about how straightforward this will be and therefore how easy it will be for you to pay off your auction loan.
The best thing to do in this instance is to talk to your lender before you attend the auction about the property types they are comfortable with and how property type might impact your conditional loan offer. It’s always worth checking this - you don’t want to get a provisional offer on a loan for a three bedroom house and find, after you’ve bid on a thatched cottage, that this only applies to standard construction homes.
Purpose
Another factor that can influence your chances of getting auction finance is what you plan to use the property for. One obvious distinction is whether you are buying a home to live in yourself, or whether you’re buying it as an investment to rent out. Many lenders will go as far as to have separate products - residential auction loans for home purchases and buy-to-let auction loans for investments. Make sure you’re clear on usage from the outset so you don’t find yourself stuck with a product that doesn’t suit your needs.
The benefits of buying a house at auction
Aside from the issue of finance, it’s worth considering for a moment why you might want to buy a property at auction in the first place.
A lot of people shy away from it as a way to buy a home or investment property because they worry about the risk, or assume they won’t be able to inspect the property beforehand, but there may be more benefits to buying at auction than you first thought.
It’s cheaper.
There are plenty of bargains to be had at auction if you do your research and know where to look, as sellers are often looking for a quick sale or selling unmortgageable properties. You’ll also have less competition than on the regular property market, which also brings prices down. With the right skills you can expect to pay 20-30% below the market value on a property bought at auction.
No delays.
One of the most frustrating parts of the traditional housing market is that deals can roll on for weeks and months, only to fall through at the last moment. Buying at auction means you do away with the risk that there’s a break in the chain - simply turn up, place your bid and if you make the highest offer the house is yours.
More transparency.
House buying in the UK can be a tricky business, with offers, counteroffers and gazumping rife. In an auction house though you know exactly where you stand and can even see the other buyers if they are there in person. It’s a very transparent process, with no games or surprises.
It’s a misconception that buying at auction means buying from photos or from a few details online - you can visit auction properties before the sale and go through all the usual house buying processes like having a survey done. You just need to be sure to gather all the information you need ahead of bidding, because once the hammer comes down the deal is done.
Are there any risks with an auction bridging loan?
There are always risks associated with any form of borrowing, especially unregulated borrowing. You will have assets secured against the loan - generally the property you are buying with it - and if at the end of the term you do not repay the loan in full then you are at risk of having the property repossessed and sold to cover your debt.
Auction bridging loans can be higher risk than some other types of borrowing because of the inherent risk involved in buying at auction where you sometimes have less opportunity to thoroughly investigate a property. Being able to pay back your loan relies on you either being able to sell the property at a profit or being able to refinance it - if you encounter any problems during the refurbishment, selling or mortgaging process this could impact your auction finance.
The best way to mitigate this risk as much as possible is to take independent financial advice before you start from a specialist auction finance broker. They will be able to assess your financial situation, check the viability of your exit strategy and help to make sure that auction finance is the best course of action for you.
Conclusion
You should now have a full and clear understanding of what’s involved in securing auction finance and buying a property at auction, as well as the benefits and potential uses of auction finance and how much you can expect to pay.
If you're considering buying a property at auction and want to speak to a specialist broker about your finance options then get in touch today and one of our experts will be happy to help.
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