Essential Guide to Auction Finance for Smart Property Investors

Auction Finance

Buying a property at auction can be an exciting and cost-effective way to snap up a bargain, but it’s not for the faint-hearted. If you’re considering buying a home, investment property, development opportunity, or other auction properties, understanding auction finance is critical.

Auctions allow buyers to buy property for investment or personal use, often at competitive prices. Unlike traditional purchases, auction timelines are fast, and funding delays can cost you dearly.

What Is Auction Finance?

Auction finance is a short-term loan used to purchase property at auction. This would be when traditional mortgages are either too slow or unsuitable due to the property’s condition or your timeline. It’s typically in the form of a bridging loan (also known as bridging finance) or specialist short-term mortgage, designed to complete within 28 days of a successful auction bid.

These loans are ideal when:

• The property needs refurbishing or is unmortgageable in its current state.
• You need to complete quickly (auctions usually require completion within 20–28 days).
• You want to refinance or sell the property once improvements are made.

Bridging finance is often the ideal solution for buyers who need quick and flexible funding to secure auction properties within tight deadlines.

Understanding Bridging Loans

Bridging loans are a popular form of short term finance, especially in the fast-paced world of property auctions. When you need to secure a property quickly, whether it’s a residential or commercial property, bridging loans can provide the funds you need to complete the purchase before arranging longer-term financing, such as a traditional mortgage. These loans are typically secured against the property being purchased, and are designed to be repaid within a few months to a year.

One of the main attractions of bridging loans is their speed and flexibility. Unlike traditional mortgages, which can take weeks or even months to arrange, bridging loans can often be approved and paid out in a matter of days with great organisation and a specialist broker. This is crucial when you’re facing tight auction deadlines.

However, this convenience comes at a cost, the interest rate on a bridging loan is usually higher than a standard mortgage, and you’ll need to budget for arrangement fees and exit fees as part of the overall cost of finance. Despite these higher costs, bridging loans remain a go-to solution for buyers who need to act fast in auctions, whether they’re purchasing residential homes, commercial properties, or even land.

Pros of Auction Finance

Cons of Auction Finance

Understanding Bridging Loans

Bridging loans are a popular form of short term finance, especially in the fast-paced world of property auctions. When you need to secure a property quickly, whether it’s a residential or commercial property, bridging loans can provide the funds you need to complete the purchase before arranging longer-term financing, such as a traditional mortgage. These loans are typically secured against the property being purchased, and are designed to be repaid within a few months to a year.

One of the main attractions of bridging loans is their speed and flexibility. Unlike traditional mortgages, which can take weeks or even months to arrange, bridging loans can often be approved and paid out in a matter of days with great organisation and a specialist broker. This is crucial when you’re facing tight auction deadlines.

However, this convenience comes at a cost, the interest rate on a bridging loan is usually higher than a standard mortgage, and you’ll need to budget for arrangement fees and exit fees as part of the overall cost of finance. Despite these higher costs, bridging loans remain a go-to solution for buyers who need to act fast in auctions, whether they’re purchasing residential homes, commercial properties, or even land.

What to Look Out for Before Bidding

1. Get a Decision in Principle (DIP) / Agreement in Principle (AIP): Secure a decision in principle auction finance before bidding to prove you’re ready to complete. Many lenders offer a same-day response with a soft credit check, making it quick and easy to show you have pre-approval.
2. Legal Pack Review: Always have a solicitor review the legal pack before bidding, hidden clauses or covenants can be deal-breakers.
3. Valuation vs Purchase Price: Lenders may lend against the lower of the purchase price or market value – check the difference.

Note: Lending decisions are based on lender criteria, credit checks, and your individual circumstances.

4. Exit Strategy: Be clear on how you’ll repay refinancing, sale, or personal funds and ensure it’s realistic within the loan term.
5. Hidden Costs: Budget for arrangement fees, interest, broker fees, solicitor fees, and exit fees.
6. Timing: Some auction houses require completion in just 20 working days, coordinate your solicitor and broker early.

Loan Details

When considering a bridging loan for an auction purchase, it’s important to understand the key loan details and how they may vary depending on your individual circumstances and the lender’s criteria. Typically, lenders will offer a loan amount of up to 75% of the property purchase price, though this can vary on a case by case basis.

The interest rate for a bridging loan is generally higher than a traditional mortgage, often ranging from 1% to 2% per month, reflecting the short term nature and increased risk of this type of finance.

In addition to the interest rate, borrowers should be aware of other costs, such as an arrangement fee. This is usually 1% to 2% of the loan amount and potential exit fees payable when the loan is repaid. The loan term is usually short, from a few months up to a year, and the loan is secured against the property being purchased.

Every borrower’s situation is unique, it’s essential to review all loan details carefully, including the gross loan amount, net loan amount, and any additional fees. Before committing to a bridging loan consulting with a specialist broker can help you compare loan options and ensure you’re getting a good deal for your property purchase.

Lenders Who Offer Auction Finance

Auction Finance for Investors

For property investors, auction finance offers a flexible and efficient way to acquire new assets, whether targeting residential or commercial properties. Bridging loans are particularly useful for investors who need to move quickly to secure a property at auction, then refinance with a traditional mortgage or sell the property to repay the loan.

This approach allows investors to take advantage of opportunities that might otherwise be out of reach due to the tight deadlines imposed by auction houses.

Auction finance can also be used to fund refurbishments or development projects, providing short term finance to add value before refinancing or selling. However, investors should carefully consider all costs involved including interest payments, arrangement fees, and exit fees as well as the risks associated with short term loans.

A clear exit strategy, whether through refinancing or sale, is essential to ensure the investment remains profitable. As always, seeking professional advice and thoroughly assessing each property and loan option will help investors make informed decisions and maximise returns from auction purchases.

Broker Tips for Auction Success

• Speak to a broker early – ideally before the auction date.
• Have your solicitor lined up and ready to act fast.
• Prepare all documents in advance: ID, proof of funds, auction contract, etc.
• Consider using a broker experienced in auction finance – mainstream advisers may not understand the nuances.
• Build in time for valuation delays – especially if the property is unique or in rural areas.

Legislation and Regulation

Navigating the legislation and regulation surrounding auction finance is crucial for both lenders and borrowers. Bridging loans and other forms of auction finance are regulated by the Financial Conduct Authority (FCA), which sets standards for lenders and provides protections for borrowers.

However, the regulatory framework for bridging loans is generally less stringent than for traditional mortgages, meaning borrowers need to be especially vigilant about the terms and costs of their loan.

It’s important for borrowers to understand their rights and responsibilities, as well as any consumer credit laws that may apply. Changes in legislation or regulation can impact the costs and availability of auction finance, so staying informed and seeking professional advice is essential.

Always review the full terms and conditions of any bridging loan, and ensure you are comfortable with the repayment schedule, fees, and any other obligations before proceeding with your property purchase.

Case Studies

Real-world auction finance case studies can offer valuable lessons for buyers and investors considering bridging loans for property auctions. For example, one case study might feature a buyer who used a bridging loan to purchase a residential property at auction, completed essential refurbishments, and then refinanced with a traditional mortgage.

This helped unlocking additional value and securing a long-term home. Another example could involve an investor who secured a commercial property at auction using a bridging loan, improved the property, and then sold it at a profit, repaying the loan in full.

These auction finance case studies highlight both the opportunities and challenges of using bridging loans for auction purchases. They demonstrate how quick access to finance can help buyers secure properties that might otherwise be out of reach, but also underscore the importance of careful planning, clear exit strategies, and understanding all associated costs.

By learning from the experiences of others and consulting with property finance professionals, borrowers can approach property auctions with greater confidence and increase their chances of a successful outcome.

Final Thoughts

Auction finance is a powerful tool for property investors and developers but it’s not a “one-size-fits-all” solution. It requires preparation, a clear exit plan, and trusted advisers who can move at speed.

Whether you’re a seasoned investor or a first-time auction buyer, working with a broker who understands the auction process can mean the difference between a smooth completion or losing your deposit.

Get help from an experienced mortgage broker

You can speak to one of our specialist mortgage brokers who would be able to guide you through the process. They will advise if there is a lender available and the maximum loan amount based on your circumstances. We are a whole of market mortgage brokerage with access to all lenders. Call us on 01332 470400 or complete the form with your details for us to give you a call back.

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