Guide to buying property at auction

Buying a property at auction can be a great way to potentially get a bargain, but traditional mortgages may not be suitable for financing such purchases. 

Auction properties typically have tight deadlines and quick completion times, which can make securing a traditional residential mortgage challenging and risky. 

If you are unable to complete the purchase on time, you may risk losing your 10% deposit as soon as the hammer goes down.

As a result, there are specific finance options available for auction purchases to facilitate the process. 

In the guide, we discuss the finance options available to those who are looking to purchase at an auction.

What is auction finance 

Auction finance in the UK is a type of specialised financing that is designed to help people or businesses purchase properties or goods at auctions. It provides funding to buyers who may not have immediate access to sufficient cash or liquid assets to participate in an auction.

Auction finance typically involves short-term loans or bridging loans that are secured against the property or goods being purchased at the auction. These loans are usually provided by specialist lenders who understand the unique nature of auctions and can work quickly to provide funding within tight timelines.

Auction finance in the UK may be used for various purposes, including purchasing residential or commercial properties.

How does it work

Property auction finance is a type of short-term financing that is specifically designed to help buyers purchase a property at auction with quick turnaround times. It allows buyers to secure funding within a short period, typically 14 days, which is useful as property auctions often have tight completion deadlines, usually 28 days.

Property auction finance is typically structured as an interest-only mortgage, where borrowers make monthly payments towards the interest accrued or can choose to have the interest rolled up with no monthly payments. The loan term is usually short, ranging from 1 to 12 months, although in some cases, it can be extended up to 36 months.

Interest rates for property auction finance are generally higher than traditional mortgage finance, as they reflect the short-term nature and higher risk associated with auctions. However, this type of financing can be useful for buyers who need quick access to funds and have a clear exit strategy in place.

The common exit strategy for repaying the property auction finance is through remortgaging the property or selling it. Once the property is remortgaged or sold, the proceeds are used to repay the bridge loan in full, including the principal amount and accrued interest.

How much deposit you will need

 The exact percentage may vary depending on the lender and the type of property being financed, but as a general guideline, a minimum deposit of 25% is typically required for residential properties, and 35% for commercial properties.

While it’s possible to secure bridging finance with a lower deposit or equity contribution, it may be more challenging as it increases the perceived risk for the lender. In such cases, lenders may impose higher interest rates or other fees to compensate for the increased risk.

How much will it cost 

Bridging finance, including for property auction purchases, is typically quoted and calculated on a monthly basis, as opposed to traditional residential mortgages which are quoted annually. The interest rates for bridging finance are usually higher than those for traditional mortgages, given the short-term nature and higher risk associated with bridging loans.

The monthly interest rates for bridging finance can vary depending on the lender, the borrower’s creditworthiness, the type of property being financed, and other factors. As a general guideline, monthly interest rates for bridging finance typically range from 0.5% to 1.5% per month, which translates to an annual interest rate of 6% to 18%.

In addition to the interest rates, there are usually fees associated with bridging finance. These fees can include arrangement fees, exit fees, and other administrative fees. As you mentioned, fees for bridging finance typically range from 1.5% to 3% of the loan balance, but this can vary depending on the lender and the specific terms of the loan.

For example a £100,000 bridge at 0.75% interest rate and 2% fee would cost £750 per month and incur a £2,000 fee

Repaying auction bridging finance 

When it comes to repaying bridging finance, borrowers typically have three options: rolled up, retained, or monthly payments.

• Rolled up: With this option, the borrower does not make any monthly interest payments. Instead, the interest is “rolled up” or added to the loan balance, and the borrower repays the total amount, including the principal and accrued interest, at the end of the loan term or upon the sale or refinance of the property.
• Retained: With this option, the borrower pays the interest upfront at the beginning of the loan term, and the principal amount is retained or held back by the lender. The retained amount is then released to the borrower at the end of the loan term or upon the sale or refinance of the property.
• Monthly payments: With this option, the borrower makes monthly interest payments to the lender throughout the loan term. The monthly payments typically cover only the interest portion of the loan, and the principal amount remains unchanged. The borrower will need to arrange for a separate repayment strategy, such as refinancing or selling the property, to repay the principal at the end of the loan term.

The repayment option chosen will depend on the borrower’s financial situation, cash flow requirements, and overall strategy for repaying the bridging finance. Each option has its pros and cons, and it’s important to carefully consider and discuss with the lender to determine the most suitable repayment option for your specific needs 

What type of property can you buy with auction finance 

Auction finance can be used to purchase various types of properties, including:

• Residential properties: This includes properties intended for residential use, such as houses, apartments, and condos.
• Commercial properties: This includes properties intended for commercial use, such as offices, retail spaces, warehouses, and industrial properties.
• HMO (House in Multiple Occupation): These are properties that are rented out to multiple tenants who have separate agreements for their individual rooms or living spaces, such as student accommodations or shared houses.
• Buy-to-let properties: These are properties purchased with the intention of renting them out to tenants for long-term investment purposes.
• Uninhabitable properties: These are properties that may require significant renovations or repairs before they can be occupied or rented out, such as properties in need of extensive refurbishment or properties with structural issues.
• Land and agricultural properties: This includes undeveloped land or agricultural properties, such as farms, agricultural land, and rural properties.
• Non-property related assets: In some cases, auction finance may also be used to purchase non-property related assets, such as machinery, equipment, or vehicles, depending on the lender’s policies and the borrower’s requirements.

How to apply

When applying for business auction bridging finance, it’s important to have your documents ready and be prepared to undergo a credit check. Working with a reputable broker can also be beneficial in navigating the application process. Here are some steps you can take when applying for business auction bridging finance:

• Gather necessary documents: Prepare all the required documents, including purchase details, borrower information, exit strategy, loan amount and term, property valuation, legal and conveyancing details, security details, credit history and financials, and any other documentation that may be required by the lender.
• Run a credit check: Be prepared for the lender to conduct a credit check to assess your creditworthiness. Make sure your credit history is in good shape and be ready to provide any necessary information or explanations regarding your credit profile.
• Engage a reputable broker: Consider working with a broker who specializes in auction finance to help you navigate the application process. A broker can assist in finding the right lender, negotiating loan terms, and ensuring that all necessary documents and requirements are met.

Are you eligible?

Here are the key eligibility criteria when raising auction bridging finance.

• Exit Strategy: Auction bridging finance is typically based on the borrower’s exit strategy, which could include selling the property being purchased, selling another property owned by the borrower, or refinancing the property with a traditional mortgage.
• Experience: Some lenders may require previous experience in buying and selling properties at auction, demonstrating familiarity with the unique risks and challenges associated with auction purchases.
• Deposit: A minimum deposit is typically required, with 25% for residential properties and 35% for commercial properties being common. A higher deposit may result in more favorable terms, such as lower interest rates.
• Credit Report: Lenders will conduct a credit report on the borrower to assess their creditworthiness. While a good credit history is preferred, some lenders may be more flexible than traditional mortgages in considering credit reports for auction finance.

Can I use auction finance to buy a repossession?

Yes, Bridging finance can be used to purchase properties at auction, but borrowers need to meet the usual criteria set by the lender.

For more info on buying properties at auction, please contact a member of the Strive team, by emailing info@strivemortgages.co.uk or call us on 01273 002697.