Getting auction finance

Explore additional details regarding financing options for auctions.
Interested in auction finance? Take a closer look at the upsides and downsides of using auction finance to purchase your dream property in 2024.
Auction finance

Whether you are an experienced property developer looking to expand your portfolio, a buy-to-let landlord aiming to acquire more rental properties, or a homeowner seeking to buy a unique property in 2024, auction finance could be a viable option. As well as covering the purchase price of the property, some auction finance providers may also cover the cost of any necessary renovations or refurbishments, allowing you to transform your auction property into a lucrative investment or a dream home.

However, like any form of finance, it’s essential to understand the ins and outs of auction finance to make an informed decision. This includes knowing how to apply, the typical terms and conditions, the costs involved, and the potential advantages and disadvantages. By gaining a solid understanding of auction finance, you’ll be well-positioned to navigate the exciting world of property auctions.

What is auction finance?

Auction finance, also known as a property auction loan or bridging loan, is a type of short-term loan designed specifically for buying a property at an auction.

When you win a property at auction, you’re usually required to pay a 10% deposit immediately, and then you typically have 28 days to come up with the remaining 90% of the purchase price. This is a much quicker turnaround than a traditional mortgage or property loan can offer, which is why auction finance is a popular choice for property auction buyers.

Auction finance works like a short-term bridging loan, providing you with the funds you need to complete the purchase. This can be particularly useful if the intention is to refurbish the property and then sell it on or if you plan to refinance with a traditional mortgage once you own the property.

It’s important to note that, as with any form of borrowing, there are risks involved, and auction finance often comes with higher interest rates than traditional long-term mortgages. Therefore, it’s crucial to have a clear plan for repayment before proceeding.

How does auction finance work?

Auction finance is a short-term loan that’s specifically designed to facilitate the quick purchase of a property at auction. Here’s a step-by-step guide on how auction finance typically works:

Before the Auction: Ideally, you should arrange your auction finance before attending the auction. This involves contacting a lender who specialises in auction finance and providing them with information about your financial situation and the property you intend to bid on. They can then provide you with an ‘agreement in principle’, giving you an idea of how much they might be willing to lend if you win at auction.

At the Auction: If you win a bid at auction, you’ll typically be required to put down a 10% deposit on the spot and sign a contract agreeing to pay the remaining 90% of the purchase price within a set timeframe, usually 28 days.

After the Auction: Once the auction has ended and you have secured the property, you need to inform your lender. The lender will then conduct a formal valuation of the property, and, if everything checks out, they will finalise your loan and provide the funds to complete the purchase.

Repayment: The specifics of repayment can vary, but generally, you’ll need to repay the loan in full, plus interest, within a set period, typically within 6 to 12 months. This is usually achieved by either selling the property on if you’ve made improvements and want to make a profit, or refinancing with a traditional mortgage, if you plan to keep the property.

Remember that, as with any loan, defaulting on repayment can lead to serious consequences, such as the lender repossessing and selling the property to recover their costs. Auction finance tends to have higher interest rates and fees than regular mortgages due to its short-term nature and the risk associated with auction properties, so it’s important to have a clear exit strategy in place.

What is the maximum amount I can borrow?

The amount you can borrow with auction finance depends on a variety of factors, including your financial situation, the value of the property you’re planning to buy, and the lender’s specific criteria.

In the UK, auction finance typically covers up to 75% of the property’s value, although some lenders may go up to 80% or even 100% in certain cases if additional security is provided. However, it’s important to keep in mind that the amount lent will also be based on the lender’s valuation of the property, which might not match the auction price, especially if you’re bidding on a property with potential that hasn’t yet been realised.

While it’s difficult to provide a maximum amount without specifics, auction finance loans can potentially range from a few thousand to several million pounds. This is why it’s a good idea to secure an agreement in principle before attending an auction, as it gives you a clear idea of your borrowing limit and ensures you’re only bidding on properties you can afford.

It’s crucial to keep in mind that auction finance is a form of short-term borrowing, typically with higher interest rates than a traditional mortgage. As such, you need to be confident you can repay the loan in the agreed timeframe, whether that’s through selling the property, arranging a traditional mortgage, or another exit strategy.

How much of a deposit do I need?

As mentioned earlier, when you successfully bid on a property at auction in the UK, you are usually required to pay a deposit immediately. This deposit is typically around 10% of the final purchase price. It’s important to have this amount readily available on the day of the auction, as you’ll need to pay it on the spot.

The remaining balance (usually about 90% of the purchase price) is typically due within 28 days, though this can vary depending on the terms of the auction. This is where auction finance comes in, providing the funds to complete the purchase within this relatively short timescale.

Advantages

Auction finance can offer several advantages, particularly for buyers who want to purchase a property at auction but may not have the full funds available immediately. Here are a few key advantages:

Speed: Auction finance is designed to be arranged quickly. Traditional mortgages can take several weeks to months to be approved, but auction finance can often be arranged within a matter of days. This is crucial for auction purchases, where the balance payment is typically due within 28 days of the auction.

Flexibility: Auction finance can be used for a wide variety of property types, including those that might not be eligible for a traditional mortgage, such as uninhabitable properties or those in need of significant renovation.

Short-Term Solution: Auction finance is a short-term loan designed to be repaid quickly, often once the buyer has refurbished the property and sold it or secured a traditional mortgage. This allows the buyer to ‘bridge’ the gap between purchasing the property and arranging long-term financing or selling the property.

Accessibility: Auction finance can sometimes be accessible to those who might struggle to get approved for a traditional mortgage, such as those with a poor credit history or those purchasing a property as an investment. Lenders typically focus on the value of the property and the viability of the exit strategy rather than the borrower’s credit history.

Funding for Renovations: In some cases, auction finance can also provide funding for the refurbishment of the property, although this depends on the lender and the specifics of the deal.

Disadvantages

While auction finance can be a powerful tool for property investors and buyers, it does come with some potential disadvantages:

Higher Interest Rates: Auction finance usually has higher interest rates than traditional long-term mortgages because of its short-term nature and the potential risks involved. This can make the cost of borrowing quite high.

Fees and Costs: There may be several fees associated with auction finance, including arrangement fees, valuation fees, legal fees, and potentially an exit fee. These costs can add up and should be taken into consideration when calculating the total cost of the loan.

Risk of Property Repossession: If you fail to repay the loan within the agreed timeframe, the lender has the right to repossess the property to recover the money. This could mean you lose the property and any money you’ve invested in it.

Requirement for a Robust Exit Strategy: Lenders will want to see a clear and credible exit strategy – for example, selling the property or refinancing with a traditional mortgage. If your plans fall through, you might struggle to repay the loan on time.

Value Assessment Risks: The loan amount is often based on the lender’s valuation of the property. If the lender’s valuation is lower than the purchase price, you may find yourself unable to borrow as much as you anticipated.

Fast-Paced Repayment Schedule: The repayment period for auction finance is usually quite short – typically 6 to 12 months. This can put pressure on the borrower to either complete renovations and sell the property quickly or secure a long-term mortgage for refinancing.

Before pursuing auction finance, it’s important to fully understand these potential disadvantages and consider whether it’s the right option for your circumstances. Consulting with a financial advisor or a specialist in property auctions and finance can be helpful.

Fees

Yes, as with most forms of finance, there are usually several fees associated with auction finance. These may vary depending on the lender and the specifics of the loan, but they typically include:

Arrangement Fee: This is a fee charged by the lender for arranging the loan. It’s often a percentage of the total loan amount, typically around 1-2%, although this can vary.

Valuation Fee: The lender will need to conduct a valuation of the property before finalising the loan to ensure that it provides sufficient security for the borrowed amount. The cost of this valuation will usually be passed on to the borrower.

Legal Fees: Both the lender’s and your own legal fees will usually need to be covered. These cover the cost of the legal work involved in setting up the loan.

Broker Fees: If you use a broker to arrange your auction finance, they may charge a fee for their service.

Exit Fees: Some lenders charge an exit fee when the loan is repaid. Not all lenders charge this fee, and among those who do, the amount can vary considerably.

Early Repayment Charges: If you’re able to repay the loan before the agreed term, there might be charges associated with early repayment. However, this depends on the terms and conditions set by the lender.

These fees can add up and should be factored into your total cost when considering auction finance. It’s important to ask potential lenders for a full breakdown of their fees and charges before agreeing to a loan. It’s also wise to compare different lenders to ensure you’re getting the best deal.

What documents do I need?

The documents required for auction finance can vary depending on the lender’s specific requirements, but generally, you can expect to need the following:

Proof of Identity: This could be a passport or driver’s license.

Proof of Address: This might include utility bills or bank statements showing your current residential address.

Proof of Income: This can be payslips if you’re employed or accounts/tax returns if you’re self-employed. This helps the lender assess your ability to repay the loan.

Details of the Property: The lender will need to know the details of the property you’re intending to buy. This might include the auction catalogue or lot details. A valuation of the property will also be necessary, but this will usually be arranged by the lender after you’ve applied.

Business Plan/Exit Strategy: The lender will want to know your plans for the property and how you intend to repay the loan. This might involve selling the property after renovations or refinancing with a traditional mortgage.

Bank Statements: These can help demonstrate your financial stability and ability to repay the loan.

Solicitor’s Details: Auction finance involves legal agreements, and therefore you’ll need a solicitor to manage this process. You’ll need to provide the lender with your solicitor’s details.

Proof of Deposit: Some lenders may ask to see evidence that you have the funds available to cover the deposit for the property.

Requirements can vary between lenders, so it’s always a good idea to check with the specific lender for their list of required documents when applying for auction finance.

What are the common terms and conditions?

The terms and conditions for auction finance can vary depending on the lender and the specifics of the deal. However, there are some common elements that you can expect to see in most auction finance agreements:

Loan Amount: This will specify how much the lender is willing to loan you. This is typically up to 75% of the property’s value, although it can sometimes go up to 100% with additional security.

Interest Rate: The agreement will specify the interest rate for the loan. Auction finance typically has higher interest rates than traditional mortgages due to its short-term nature.

Term of the Loan: Auction finance is short-term lending, typically with a term of 6 to 12 months, although this can sometimes be extended depending on the lender and the specifics of the deal.

Repayment Schedule: This will outline how and when the loan should be repaid. Typically, auction finance is repaid in a lump sum at the end of the loan term.

Fees: The agreement will outline any fees associated with the loan, such as arrangement fees, valuation fees, legal fees, and potentially an exit fee.

Default Penalties: The agreement will specify what happens if you fail to repay the loan within the agreed term. This could include penalties and the possibility of the lender repossessing and selling the property to recover their funds.

Exit Strategy: The lender will typically want to see a clear exit strategy outlining how you plan to repay the loan. This could involve selling the property or refinancing with a traditional mortgage.

Insurance: You’ll likely be required to have appropriate insurance coverage for the property.

What are the alternatives to auction finance?

While auction finance is a popular choice for many property buyers at auction due to its speed and flexibility, it’s not the only option. There are a few alternatives you might want to consider:

Traditional Mortgage: If the property is mortgageable and you have enough time, you might be able to arrange a traditional mortgage. This could offer lower interest rates than auction finance, but the process usually takes longer and may not be suitable for all types of property.

Cash Purchase: If you have sufficient funds available, buying the property outright with cash can be a quick and straightforward option, avoiding the need to arrange any sort of finance.

Bridging Loan: While auction finance is a type of bridging loan, you could also consider a general bridging loan not designed explicitly for auctions. These loans can also be arranged quickly and could be used for a wider range of purposes, not just buying property at auction.

Buy-to-Let Mortgage: If you’re planning to buy a property to rent out, a buy-to-let mortgage might be an option. These mortgages are specifically designed for rental properties, but like traditional mortgages, they can take some time to arrange.

Private Investors or Joint Ventures: You might be able to find a private investor or a partner who’s willing to jointly invest in the property. This can spread the risk and potentially provide more funds than you could access alone.

Personal Loan or Business Loan: Depending on your circumstances, a personal or business loan might be an option. These can usually be arranged more quickly than a mortgage, but they may have higher interest rates and lower maximum amounts.

Remember, each of these options has its own advantages and disadvantages, and the best choice will depend on your individual circumstances, financial situation, and plans for the property. It’s always a good idea to speak with a financial advisor or a property investment expert to understand which option is the best fit for your situation.

Are there specific requirements for qualifying for auction finance?

The exact requirements for qualifying for auction finance can vary between different lenders, but there are a few common criteria that many lenders will look at:

Property Details: The property you intend to buy at auction will play a key role in whether you can secure auction finance. The lender will typically conduct a valuation to ensure it’s a suitable security for the loan. They’ll also want to know about the property’s condition, location, and potential for profit (if you plan to refurbish and sell).

Exit Strategy: Lenders will want to see a clear and credible exit strategy – that is, a plan for how you will repay the loan. This could involve selling the property after renovations or refinancing with a traditional mortgage.

Financial Situation: Although some lenders are more flexible than others, they will generally want to see evidence that you can afford the loan. This might involve looking at your income, savings, credit history, and other financial factors.

Experience: Some lenders might look more favourably on applicants who have experience with buying and selling property or with property renovations. If you’re new to property auctions, you might need a more detailed plan to demonstrate that your project is viable.

Deposit: You will typically need to have the funds available to pay a deposit on the property at auction, usually about 10% of the purchase price.

Every lender is different, and meeting these criteria doesn’t necessarily guarantee that you’ll be approved for auction finance.

Can auction finance cover the renovation costs of a property?

Yes, in many cases, auction finance can cover not only the purchase price of the property but also the costs of renovation. This is sometimes referred to as a “refurbishment bridge” product. It’s particularly useful for properties bought at auction that require significant work before they can be rented out or sold.

The exact amount that can be borrowed will depend on the lender and the specific circumstances, but it’s common for lenders to offer up to 70-75% of the property’s value (after refurbishment) in total. This total would include the amount borrowed to purchase the property and the estimated cost of refurbishment.

Bear in mind that the lender may want to see a detailed renovation plan and budget, and they might release the renovation funds in stages as the work progresses and is inspected rather than providing the full amount upfront.

Also, remember that auction finance and refurbishment bridge products are short-term solutions. You’ll need a clear exit strategy to pay off the loan once the work is completed, such as selling the property or refinancing with a long-term mortgage.

How does auction finance differ from traditional property finance?

Auction finance and traditional property finance (typically a mortgage) are both ways to fund a property purchase, but they operate quite differently and are suited to different situations. Here are some of the key differences:

Speed of Arrangement: Auction finance is designed to be arranged quickly, often within days. This is crucial for auction purchases, where the full payment is usually due within 28 days of the auction. In contrast, a traditional mortgage can take several weeks or even months to be approved and arranged.

Property Type and Condition: Traditional mortgages are usually only granted for properties that are in a good state of repair and are considered ‘habitable’. Auction finance, on the other hand, can be used for a wider range of properties, including those in poor condition or in need of significant renovation.

Term of the Loan: Auction finance is a short-term solution, typically lasting from a few months up to a year. A traditional mortgage is a long-term commitment, usually lasting for 25-30 years.

Repayment Structure: With auction finance, the entire loan plus interest is usually repaid in a lump sum at the end of the term. With a traditional mortgage, repayments are made in regular monthly instalments over the life of the loan.

Interest Rates: Auction finance typically comes with higher interest rates compared to traditional mortgages due to its short-term nature and the higher risk involved.

Exit Strategy: Auction finance requires a clear exit strategy – the means by which you will repay the loan at the end of the term. This might involve selling the property or refinancing with a traditional mortgage. In contrast, the exit strategy for a mortgage is essentially the gradual repayment of the loan over the agreed term.

While both types of finance have their pros and cons, the choice between them will depend on the specifics of the property, the buyer’s financial situation, and their plans for the property.

How quickly can I secure finance before a property auction?

Auction finance is designed to be arranged quickly to meet the tight deadlines associated with property auctions. Some lenders can give an initial decision in principle within hours, and the funds can potentially be ready within days. However, the exact timeframe can vary depending on the lender and the specifics of the situation.

That being said, it’s always a good idea to start the process as early as possible before the auction. This allows time to gather all necessary documents, complete the application, have the property valued, and deal with any potential issues that might arise.

Also, keep in mind that even though the auction finance process can be fast, it still requires a thorough assessment of your financial situation and the property you’re intending to buy. The lender will need to carry out their due diligence to ensure the loan is viable, which will include a valuation of the property.

In short, while it’s possible to secure auction finance very quickly, it’s best not to leave it to the last minute. Starting the process at least a few weeks before the auction is generally a good idea.

Is there any possibility of refinancing into traditional mortgages in the future?

Yes, it’s quite common for people to refinance auction finance loans with a traditional mortgage in the future, and in many cases, this is the planned exit strategy from the start.

This process usually involves using the auction finance to purchase and potentially renovate the property, and then once the work is complete and the property is considered ‘habitable’ and perhaps has increased in value, the owner takes out a traditional mortgage to repay the auction finance loan.

This strategy can be particularly beneficial for properties that need significant work before they can be mortgaged. The auction finance allows the owner to buy and renovate the property quickly, and the mortgage provides a longer-term, lower-interest-rate option for financing the property once it’s in good condition.

However, it’s important to note that getting a mortgage requires meeting the lender’s criteria at the time you apply, which will typically involve a thorough assessment of your income, credit history, and other financial circumstances. Also, the property itself must meet the lender’s criteria. Therefore, it’s crucial to have a viable backup plan in case you’re unable to secure a mortgage when the time comes to refinance.

How is the property valued for the purpose of auction finance?

The valuation of a property for the purposes of auction finance is an important step in the application process. It helps the lender determine the amount of money they’re willing to loan, as the property serves as the security for the loan. Here’s a general overview of how the process usually works:

Choosing a Valuer: Once you’ve applied for auction finance and the lender has conducted an initial assessment, they’ll typically arrange for a professional valuer to visit the property. The valuer is usually a chartered surveyor who is independent and accredited by a recognised body such as the Royal Institution of Chartered Surveyors (RICS) in the UK.

Physical Inspection: The valuer will visit the property and conduct a physical inspection. They’ll assess the property’s condition, size, location, and other relevant factors.

Market Analysis: The valuer will also analyse the local property market, looking at recent sale prices of similar properties in the same area to help determine the property’s market value.

Final Valuation Report: The valuer will compile their findings into a final valuation report, which will be sent to the lender. This report will provide an estimated market value of the property.

The loan amount you can secure with auction finance is usually based on a percentage of this valuation – often around 70-75% of the property’s value, but it can be higher or lower depending on the lender and the specifics of the situation.

Please note that the cost of this valuation is usually passed on to the borrower, so it’s an expense you should factor in when considering auction finance.

Can I use this if I’m a first-time buyer at a property auction?

Yes, first-time buyers can certainly use auction finance. In fact, auction finance can be particularly useful for first-time buyers at a property auction, as it’s designed to be arranged quickly and can be used for a wide range of properties, including those that might not be eligible for a traditional mortgage due to their condition.

However, keep in mind that auction finance is a type of short-term loan with higher interest rates compared to traditional mortgages, and it requires a clear exit strategy, such as selling the property or refinancing with a traditional mortgage.

Also, while being a first-time buyer doesn’t necessarily prevent you from qualifying for auction finance, lenders might look more favourably on applicants who have some experience with property. They might require a more detailed plan or additional guarantees if you’re a first-time buyer.

As a first-time buyer, it’s especially important to do your homework, understand all the costs involved, and potentially seek advice from a property or finance expert. Buying at auction can be a great opportunity, but it can also be risky, especially if you’re new to the process.

How are the monthly repayments of an auction finance loan calculated?

Auction finance, often considered a type of bridging loan, typically works differently from traditional mortgages when it comes to repayments. Instead of paying off the loan in regular monthly instalments over a long period, the full amount of an auction finance loan – including the capital and the accrued interest – is usually paid back in one lump sum at the end of the agreed loan term.

However, the calculation of the interest that will accrue over the loan term usually depends on the specific terms of the loan and the lender’s policies. The interest might be calculated monthly, daily, or annually. It’s generally charged on the outstanding loan balance and then added to the loan amount to be paid off at the end of the term.

Some lenders may also offer options for monthly interest payments, where the borrower pays off the interest each month and then repays the capital in full at the end of the term. This can reduce the total amount to be paid at the end of the term but means higher costs during the term of the loan.

Here’s a simplified example of how the accrued interest might be calculated:

Suppose you borrow £100,000 at an interest rate of 1% per month for a term of 6 months, and the interest is rolled up to be paid off at the end. Each month, you’d accrue £1,000 in interest (1% of £100,000), which would be added to the loan amount. After 6 months, you’d owe the original £100,000 plus £6,000 in accrued interest.

Please note that this is a simplified example and doesn’t take into account other possible charges and fees. The exact terms of your loan, including how the interest is calculated and when it’s due, should be clearly laid out in your loan agreement. It’s always a good idea to make sure you fully understand these terms and to seek advice if anything is unclear.

Is there a way to pre-qualify or get pre-approved?

Yes, many lenders offer a way to pre-qualify or get pre-approved for auction finance before you attend a property auction. This process involves an initial assessment of your financial situation to determine how much you might be able to borrow.

Here are the steps you would typically follow to get pre-approved for auction finance:

    1. Contact the Lender: Reach out to a lender who offers auction finance and express your interest in getting pre-approved.
    2. Provide Necessary Information: The lender will need to know about your financial situation, including your income, assets, and liabilities. They’ll also want to understand your plans for the property you intend to buy, such as whether you plan to renovate and sell it or rent it out.

    3. Receive a Decision in Principle: Based on this initial assessment, the lender can provide a decision in principle, which is a non-binding offer stating how much they might be willing to lend you.

    4. Prepare for the Auction: With this pre-approval in hand, you can go into the auction with a clear idea of your budget. You can also demonstrate to the sellers that you have a concrete plan to finance the purchase, which may give you an advantage.

Can this be arranged for international buyers?

Yes, auction finance can potentially be arranged for international buyers, but the process can be more complex and the lending criteria may be more stringent. The exact rules and requirements will vary by lender and by country.

Lenders may require international buyers to provide additional documentation or guarantees. For example, they may require proof of income from a foreign source, proof of identity, and evidence of residency. Some lenders may also require international buyers to have a UK bank account.

Additionally, it may be more difficult for international buyers to meet certain lending criteria. For example, lenders may require a higher deposit or offer a lower loan-to-value ratio (LTV) to international buyers due to the perceived increased risk.

Finally, the lender will still need to conduct a valuation of the property and conduct all the usual checks to ensure that the loan is viable. The property being purchased will need to be in the UK, even if the buyer is not.

What types of property can I buy?

With auction finance, you can potentially buy a wide range of property types, subject to the lender’s criteria and the suitability of the property as security for the loan.
Here are some types of property you might consider:

Residential Properties: These include houses, flats, and apartments. Residential properties may be vacant, tenanted, or in need of refurbishment.

Commercial Properties: This category includes properties like offices, shops, restaurants, warehouses, and industrial units. Commercial properties can also be bought for investment purposes or for the buyer’s own business use.

Mixed-Use Properties: These are properties that have both a residential and a commercial component, such as a shop with a flat above it.

Buy-to-Let Properties: These are residential properties purchased with the intention of renting them out to tenants.

Development Opportunities: These can be properties that require significant renovation or plots of land where there is potential to construct new properties.

Agricultural Properties: This can include farmhouses, barns, and land suitable for farming or other rural businesses.

However, it’s important to note that the property’s condition and its potential for refurbishment, redevelopment, or rental income can significantly influence its suitability for auction finance. Some lenders may not finance properties of non-standard construction, properties in a state of disrepair, or properties with certain types of commercial usage.

How to start an application

Starting an application for auction finance typically involves the following steps. However, the process can vary depending on the lender:

Research Lenders: Look for lenders who offer auction finance and compare their terms, interest rates, and customer reviews. Check their requirements to ensure you qualify. Some lenders may specialise in certain types of properties or borrowers, so be sure to choose one that suits your needs.

Initial Inquiry: Reach out to the lender for an initial discussion. This is often done online or over the phone. You’ll typically provide basic information about yourself, the property you’re interested in, and your plans for the property.

Pre-Approval: Based on this initial information, the lender might offer a pre-approval or a decision in principle. This is a non-binding offer that indicates how much they might be willing to lend you.

Formal Application: If you’re happy with the pre-approval, you can move on to the formal application process. This typically involves filling out a more detailed application form and providing additional documentation.

Documentation: You’ll need to provide various documents to support your application. This can include proof of identity, proof of income, bank statements, and details of your assets and liabilities. If you’re applying as a business, you may also need to provide business accounts and a business plan.

Valuation: The lender will arrange for a valuation of the property you’re planning to buy. This helps them assess the viability of the loan.

Underwriting: Once all the necessary information and documents are in place, the application will go through the lender’s underwriting process. This is where they conduct a thorough assessment of the risks involved in lending to you.

Loan Offer: If the underwriting process is successful, the lender will issue a formal loan offer. This will set out the exact terms of the loan, including the interest rate, the loan term, and any fees or charges.

Acceptance and Funds Transfer: If you’re happy with the loan offer, you can accept it, and the lender will arrange for the funds to be transferred to you.

Remember, applying for a loan is a significant financial decision, so it’s important to do your research, understand the terms, and seek advice if needed. Don’t rush the process – take the time to make sure you’re getting the right loan for your needs.

Completing the purchase

Completing the purchase of a property at auction with auction finance generally follows these steps:

Winning the Bid: Once you have successfully bid on a property at auction, you’ll usually be required to pay a deposit (often 10% of the purchase price) immediately. You’ll also sign a contract agreeing to complete the purchase within a set time frame, typically 28 days.

Finalising Auction Finance: After winning the bid, you’ll need to complete the process with your auction finance lender. This will often involve further checks and potentially a valuation of the property. Assuming all checks are successful, the lender will give final approval for the loan.

Legal Process: In parallel with finalising your finance, your solicitor or conveyancer will carry out legal work. This includes conducting searches, checking the property’s title and ensuring all contractual details are correct.

Completion: Once your auction finance is in place, your solicitor or conveyancer will coordinate with the seller’s legal representative to finalise the purchase. The balance of the purchase price (the agreed price minus the deposit you’ve already paid) will be transferred from your auction finance lender to the seller, and the seller’s solicitor will confirm the receipt of the funds.

Transfer of Ownership: Once the funds have been transferred, the property’s ownership is transferred to you. You’ll receive the keys and can take possession of the property. Your solicitor or conveyancer will register the change of ownership with the Land Registry.

Repayment Plan: Remember that auction finance is a short-term loan, and you’ll need a clear plan for repaying it. This might involve selling the property, renting it out, or refinancing with a traditional mortgage. Make sure you understand the terms of your loan and keep up with any required payments.

This is a general overview, and the exact process can vary depending on various factors, including the specific terms of the auction, the property, the lender, and the legal representatives involved. It’s always a good idea to seek advice from a professional if you’re unsure about any part of the process.

Auction finance rates

Interest rates for auction finance, which is often in the form of a bridging loan, typically vary depending on the lender, the specifics of the property, the loan-to-value (LTV) ratio, the borrower’s credit history, and other factors.

The rates are generally higher than those for traditional mortgages, reflecting the short-term nature and higher risk associated with these loans. As a guideline, you might expect rates to range from around 0.5% to 1.5% per month, but this could be higher or lower depending on your circumstances.

It’s also important to consider other costs associated with auction finance. These can include arrangement fees, valuation fees, legal fees, and potentially exit fees if you repay the loan early. These fees can be substantial and should be factored into the total cost of the loan.

Since auction finance rates can vary widely, it’s essential to shop around and compare different lenders. It can also be helpful to work with a financial advisor or broker who specialises in auction finance. They can help you understand the different options available and find the best deal for your situation.

As always, it’s crucial to understand fully the terms and conditions of any loan before you agree to it. Be sure to consider not only the interest rate but also any additional fees, the term of the loan, the repayment structure, and what happens if you can’t repay the loan on time.

Are buy-to-let mortgages suitable for auction?

As mentioned earlier, Buy-to-let mortgages can be used to purchase properties at auction, but there are several factors to consider.

First, it’s important to remember that the process of obtaining a buy-to-let mortgage can take several weeks or even months. However, when you buy a property at auction, you’re usually required to complete the purchase within a much shorter timeframe. Therefore, unless you’ve obtained a mortgage offer in principle before the auction and can complete the full application process quickly after winning the bid, a traditional buy-to-let mortgage may not be a viable option.

This is where auction finance, often in the form of bridging loans, can be useful. Auction finance is designed for short-term use and can typically be arranged much more quickly than a standard mortgage. You could then use a buy-to-let mortgage to refinance the property after the purchase, paying off the bridging loan and moving onto a longer-term, lower-interest form of finance.

Bear in mind, however, that there may be additional costs associated with this approach. Bridging loans typically have higher interest rates than standard mortgages, and there may also be fees for arranging the loan and for repaying it early. There may also be costs associated with refinancing onto a buy-to-let mortgage.

Finally, whether you’re considering a buy-to-let mortgage, auction finance, or a combination of the two, remember to seek advice from a financial adviser or broker. They can help you understand the options and find the best solution for your circumstances.

What happens if I fail to repay the loan?

Failing to repay an auction finance loan, like any form of borrowing, can have serious consequences. Here’s what could typically happen:

    1. Interest and Fees: If you miss a payment or fail to repay the loan by the end of the term, you’ll likely incur additional interest and late fees. This can increase the amount you owe significantly.
    2. Damage to Credit Score: Your missed payments or default can be reported to credit reference agencies, which could damage your credit score. This can make it more difficult and expensive for you to borrow money in the future.
    3. Legal Action: The lender could take legal action to recover the debt. This could involve court proceedings, and you might be liable for the lender’s legal costs as well as your own.
    4. Repossession: Because auction finance is usually a type of secured loan, the lender has the right to take possession of the property if you fail to repay the loan. This is known as repossession. The lender can then sell the property to recover the debt.
    5. Shortfall After Sale: If the sale of the property doesn’t cover the outstanding loan amount, plus any interest, fees, and costs, you would typically still be liable for the remaining debt.

What would happen if I win an auction, but my auction finance is not approved?

Winning a bid at an auction creates a legally binding contract, and you are expected to complete the purchase within the timeframe specified in the auction terms and conditions (typically within 28 days). If your auction finance isn’t approved, you would be in a difficult situation.

Here’s what could happen:

    • Loss of Deposit: When you win a bid at an auction, you’re usually required to pay a deposit on the spot (often 10% of the purchase price). If you fail to complete the purchase, you could lose this deposit.

    • Legal Consequences: The seller might take legal action against you to recover any losses they incur as a result of your failure to complete the purchase. These losses could include the cost of re-selling the property, any reduction in the sale price, and legal costs.

    • Auctioneer’s Sanctions: The auctioneer might also impose sanctions, such as banning you from future auctions.

To avoid such scenarios, it’s crucial to have your finances in place before you bid at an auction. This often involves obtaining a Decision in Principle (DIP) or Agreement in Principle (AIP) for a loan, which is a lender’s provisional agreement to lend you a certain amount of money, subject to final checks and approval.

However, even with a DIP or AIP, there’s always a risk that the final approval won’t go through or won’t go through in time. Therefore, it’s also important to have a backup plan. This could involve having alternative sources of finance or being prepared to negotiate an extension to the completion timeframe, although the seller is under no obligation to agree to this.

How can I better prepare for a property auction?

If you’re planning to buy a property at auction using auction finance, there are several steps you can take to prepare:

Secure Pre-Approval: Aim to secure a decision or agreement in principle for auction finance before the auction. This is a provisional offer from a lender that shows how much they may be willing to lend you, subject to final checks and approval. Remember that the actual approval and fund disbursement can still take some time.

Research the Properties: Before the auction, do your due diligence on the properties you’re interested in. This might involve viewing the property, arranging for a survey, researching the local property market, and checking the legal pack provided by the auction house.

Understand the Costs: Make sure you fully understand all the costs involved in buying a property at auction, including the deposit, auction fees, legal fees, stamp duty, and the cost of any necessary renovations or repairs.

Set a Budget: Decide on your maximum bid for each property you’re interested in, and stick to it. Remember to factor in all the costs, not just the purchase price.

Have a Backup Plan: Even with a decision or agreement in principle, there’s a risk that your auction finance won’t be approved in time or at all. Have a backup plan in case this happens, such as alternative sources of finance or a plan to negotiate an extension to the completion timeframe.

Practice Bidding: If you’re new to property auctions, consider attending a few as a spectator first to get a feel for how they work. You can also practice bidding, either in real auctions or online.

Prepare the Necessary Documents: Make sure you have all the necessary documents ready for the auction, such as proof of identity and proof of address. You’ll also need to be able to pay the deposit (often 10% of the purchase price) on the spot if you win a bid.

Seek Professional Advice: Consider seeking advice from a property professional or a financial adviser. They can help you understand the process, the risks involved, and how to prepare.

Remember, when you win a bid at an auction, you’re legally committed to buying the property, so it’s crucial to be well-prepared and to bid wisely.

How does the legal process work when purchasing a property?

When purchasing a property at auction using auction finance, the legal process typically involves the following steps:

Pre-Auction Legal Work: Before the auction, you should review the legal pack for any property you’re interested in. The legal pack usually includes the title deeds, local authority and environmental searches, fixtures and fittings list, and the conditions of sale. It’s a good idea to have a solicitor or conveyancer review these documents. At this stage, you should also obtain an Agreement in Principle from your auction finance lender.

At the Auction: If you win a bid at the auction, you’ll be required to pay a deposit (usually 10% of the purchase price) and sign the contract of sale immediately. This creates a legally binding agreement to buy the property.

Post-Auction Legal Work: After the auction, your solicitor or conveyancer will carry out further checks and searches, as necessary. They will also liaise with the seller’s solicitor and your lender to ensure all the necessary documents are in order.

Finalising the Auction Finance: After the auction, you will need to complete your auction finance application. Your lender will conduct a valuation of the property and complete their final checks. Once the loan is approved, they will provide the funds to your solicitor or conveyancer.

Completion: Completion usually occurs within 28 days of the auction, although the exact timeframe will be specified in the conditions of sale. On the day of completion, your solicitor or conveyancer will send the balance of the purchase price (the agreed price minus the deposit you’ve already paid) to the seller’s solicitor. The seller’s solicitor will then confirm that they’ve received the funds and the property is now legally yours. At this point, the keys will be released to you.

After Completion: After completion, your solicitor or conveyancer will register the transfer of ownership with the Land Registry. They will also deal with the payment of Stamp Duty Land Tax, if applicable.

Buying a property at auction involves certain legal risks, as the contract of sale is binding once the hammer falls. Therefore, it’s crucial to do your due diligence beforehand and to seek professional advice. The legal process can be complex, and a solicitor or conveyancer can help ensure that everything goes smoothly.

Will I need a mortgage advisor to buy an auction property?

Whether or not you need a mortgage advisor to buy a property at auction largely depends on your own knowledge and experience with property financing and the complexities of the specific deal.

Here are a few considerations:

    1. Understanding Financing Options: Mortgage advisors, especially those experienced with auction purchases, understand the range of financing options available, including bridging loans, auction finance, and traditional mortgages. They can help you choose the best option for your situation.
    2. Access to a Range of Lenders: Some lenders only work through intermediaries like mortgage advisors, so using one can give you access to a wider range of finance options.
    3. Faster Approval: Given the tight timelines associated with auction purchases (typically 28 days to complete), a mortgage advisor might be able to expedite the approval process because of their familiarity with it and their relationships with lenders.
    4. Complex Purchases: If the purchase involves complex elements, such as a short lease, structural issues with the property, or you plan significant renovations, a mortgage advisor’s expertise could be invaluable.
    5. Negotiating Loan Terms: A mortgage advisor could potentially negotiate better terms on your behalf, potentially saving you money over the lifetime of the loan.
    6. Guidance and Support: If you’re new to buying property at auction, a mortgage advisor can guide you through the process, reducing the risk of costly mistakes.

However, keep in mind that mortgage advisors charge fees for their services, so you’ll need to weigh this cost against the potential benefits. Some buyers with experience in property finance and auctions might choose to handle the process themselves. Even if you do decide to use a mortgage advisor, remember that the final decisions are yours. It’s important to understand all aspects of the purchase and the finance agreement before you proceed.

FAQs

Is auction finance available for both residential and commercial properties?

Yes, auction finance is available for both residential and commercial properties. Many lenders provide financing for a wide range of property types. However, the exact types of property that a lender is willing to finance can vary. Some lenders specialise in certain types of property or have restrictions on properties they will lend against.

For example, a lender might not finance properties of non-standard construction or properties in a state of disrepair.

In addition, the terms of the loan, including the interest rate and the loan-to-value (LTV) ratio, may vary depending on the type of property and its condition.

Can I use auction finance to purchase property in Scotland or Wales?

Yes, auction finance is typically available for properties located throughout the United Kingdom, including Scotland and Wales. Individual lenders may have specific criteria or geographic limitations, so always check their terms and conditions.

Is auction finance regulated by the Financial Conduct Authority (FCA)? Yes, some auction finance can be regulated by the FCA in the UK. This regulation ensures that lenders and brokers adhere to industry standards, treat customers fairly, and provide clear information about their products and services.

Can I use auction finance for land purchase, or is it only for buildings?

Auction finance can often be used for buying land as well as buildings. It will depend on the specific policies of the lender and the potential for the land to increase in value or generate income.

Does auction finance cover the full amount of the property price or only a percentage?

 Auction finance typically covers a percentage of the purchase price, often up to 75% or 80%. This is known as the loan-to-value (LTV) ratio. You would be responsible for providing the rest of the funds, as well as covering any associated costs or fees.

Are there certain property auctions or types of properties that don't qualify for auction finance?

Each lender has their own criteria for what types of properties and auctions they will finance. Some may have restrictions on the property’s condition, location, or type. Always check the lender’s terms and conditions before bidding.

Is it possible to secure auction finance without any upfront costs?

Auction finance usually involves some upfront costs, such as arrangement fees, legal fees, and valuation costs. Some lenders may allow these fees to be added to the loan, but this will increase the overall amount you owe.

Can I apply for auction finance online, or do I need to visit a lender in person?

Many lenders offer online applications for auction finance, though some may also require phone calls or in-person meetings as part of the approval process. The exact process will vary by lender.

What happens if the property I buy at auction with finance is later found to have serious structural issues?

As the buyer, you assume most of the risk in an auction purchase. That’s why it’s critical to carry out a thorough survey and conduct due diligence before bidding. If serious issues are found later, it could affect the property’s value and your ability to repay the loan.

Can I use auction finance to purchase a repossessed property at auction?

Yes, auction finance can be used to purchase repossessed properties, which are often sold at auction. Again, individual lender criteria will apply.

Can auction finance be used for purchasing auctioned properties outside the UK?

Generally, auction finance providers in the UK focus on properties within the UK. Financing properties abroad can come with additional risks and complications related to different property laws, taxation, and market conditions. However, there might be some lenders who offer international property financing, although the terms and conditions, as well as the process, might be different and more complex. Always check with the individual lender.

How does the due diligence process work with auction finance?

Due diligence for auction finance is essentially about reducing risk and involves two main components: the borrower’s ability to repay the loan and the property itself.

1. Borrower’s due diligence: The lender will assess your creditworthiness, which may include checking your credit score, reviewing your income and expenses, and looking at your financial history.


2. Property due diligence: The lender will want to ensure the property provides adequate security for the loan. This could involve a valuation survey to assess the property’s market value and a structural survey to identify any potential issues with the property.

The aim is to ensure the property is a good investment and the borrower is financially capable of repaying the loan.

Can auction finance be used to purchase a property at an online auction?

Yes, auction finance can be used for properties bought at online auctions as well as traditional in-person auctions. As long as you can provide the required details about the property and your planned exit strategy, most auction finance lenders will be willing to consider your application.

Can I use auction finance to buy a property that I intend to live in myself?

Yes, once you’ve purchased your home, you can usually make home improvements, but you may need to get permission from your housing association first, particularly for significant alterations.

How can I increase my chances of getting approved for auction finance?

Here are some ways to increase your chances of approval:
1. Good Credit History: Ensure you have a good credit rating, as this indicates a lower risk to lenders.

2. Strong Exit Strategy: Show how you plan to repay the loan, either by selling the property or refinancing onto a traditional mortgage.

3. Clear Business Plan: If the property is for investment, a clear business plan demonstrating potential profitability can reassure lenders.

4. Adequate Deposit: The more money you can put down initially, the more likely you are to secure finance, as it reduces the risk to the lender.

5. Professional Advice: Seek advice from a mortgage broker or financial advisor who understands auction finance.

6. Ensure Paperwork is in Order: Have all necessary documentation ready to avoid delays in processing your application.


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