Whether you’re buying a property to live in or as an investment, buying at auction can be a great way to find a bargain and buy quickly with no risk of being gazumped.
The short timeframes involved with traditional auctions mean it can be tricky to get a mortgage approved in time if you don’t have the cash.
If your bid is successful you’re legally bound to buy the property as soon as the auctioneer’s hammer goes down and you have to exchange contracts and pay a 10% deposit there and then. After that you have 28 days to complete the purchase.
Online, or “conditional”, auctions give you more time – there’s usually a 30-day period during which you can submit your bid and then you have 28 days to exchange contracts and a further 28 to complete – 56 days in total.
Many properties sold at auction are also “unmortgageable”, as they’re not immediately habitable because they’re dilapidated or don’t have a working kitchen or bathroom, or they’re unusually constructed, for example.
Compare bridging loan rates
Table: sorted by monthly interest rate
Overall representative example for regulated bridging loans
If you borrowed £195,000 over a 1-year term at 8.40% p.a. (fixed), you would make 12 monthly payments of £1,399.93 and pay £211,799.16 overall, which includes interest of £16,799.16, a broker fee of £995 and a lender fee of £3995.00. The overall cost for comparison is 11.6% APRC representative.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
How to get a loan to buy at auction
If you can’t get a mortgage your best option is auction finance, which is effectively a bridging loan. This is short-term finance you take out for 12-18 months, although it could be for as little as one month or as much as two years, and then pay it off by either selling the property or refinancing it with a mortgage.
It can be arranged quickly. In as little as 7-10 days or less is possible but definitely within the timeframe needed for an auction purchase.
It’s best to speak to a specialist auction finance broker who will look at all the loans available to find the best one for you. They can also get you a decision in principle before the auction, which means you’ll know beforehand that you’re likely to be approved for a loan and it can be arranged more quickly if your bid is successful.
You can usually borrow up to 75% of the property’s value or purchase price. However, the set-up fees and interest may be charged at the outset, which means you would end up with around 70% to buy the property. Alternatively, you may be able to make interest payments each month or pay it all off at the end.
It may also be possible to borrow up to 100% if you have other assets to use as security. Loan amounts generally start at £25,000.
Things to consider when taking out auction finance
Your personal finances are less important with auction finance than they are with a mortgage, although the lender will still want to do credit and identification checks. The main focus will be on the property you want to buy, which the loan will usually be secured on, although it could be secured on property or other assets you already own.
You’ll need to show a clear exit strategy (how you intend to pay off the loan) to be approved.
You may be planning to renovate the property and then sell it to pay it off using some of the profits. Or you may be planning to rent out the property once it’s in a habitable state, so intend to take out a buy-to-let mortgage to repay it. If you plan to live in the property yourself after refurbishing it you should be able to get a residential mortgage, although bear in mind that you’ll need a regulated bridging loan to buy it.
Whatever your strategy, the lender will want to be sure that it’s viable for the property you’re buying. You may need to get a decision in principle for a mortgage when you apply for the auction finance if this is your plan.
There may be an arrangement fee for the loan, an exit fee if you pay it off early, a redemption fee for closing your account when you repay the loan and legal fees but you often won’t have to pay all of these.
It’s a good idea to get a valuation and survey done of the property you’re interested in and ask your solicitor or licensed conveyancer to check the legal pack supplied by the auction house before the auction so you can be sure of what you’re buying. You would lose the money you paid for these if you weren’t successful at the auction though.
You should also get advice from professionals about the cost of any renovations.
Pros and cons of auction finance
The main benefits of auction finance are that it can be taken out on properties that are not mortgageable and can be arranged quickly.
You can use it to buy properties that need extensive renovations, so it allows you to buy and refurbish a property or convert it, into flats or from a commercial to a residential property for example, to sell for a profit or to let.
It can be used to buy all types of residential properties, including houses in multiple occupation (HMOs), which have multiple tenants, land and commercial properties.
And as your credit history and income are less important than the property itself, it may be easier to get auction finance than a mortgage if you have had credit problems in the past or have a relatively low income or are self-employed.
You don’t have to make any payments during the term of the loan, which frees up your money for any renovation work.
The downsides of auction finance are that it is relatively expensive so should only be used as a short-term solution, and you could face substantial penalties if your exit strategy fails and you can’t pay off the loan at the end of the term.
Bottom line
Auction finance can be a good option for funding an auction purchase if you can’t get a mortgage, as long as you have a viable exit strategy for paying off the loan at the end of the term.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
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