What is Auction Finance?
When you buy a property at an auction you will be tied into very tight deadlines, failing to meet the deadlines can be very costly for you and you can lose your deposit!
A standard mortgage can’t typically be arranged quick enough for an auction property and a bridging loan is typically used. This allows you to complete your auction purchase within the time scale needed whilst you secure a traditional mortgage or buy to let mortgage against the property.
How does it work?
Auction finance via a bridging loan is:
- Short term finance, typically 3 to 6 months (can go for as long as 36 months)
- Interest only on a rolled up or serviced basis
- Very quickly arranged, typically within 14 days
- Used to purchase many different property types(some that a traditional lender would not lend on)
- Are more expensive than a traditional mortgage
- Can be very costly if you are unable to exit the auction finance at the end of the term
- You will need a deposit between 10% - 25%
- Auction finance arrangement fees can be expensive
- Auction finance is not suitable for everyone
- There are lenders who offer an open ended bridging loan rather than a closed loan
Do I need a deposit for Auction Finance?
Yes, you will need a deposit of at least 10%,however the majority of lenders will ask for a 25% deposit. It is possible to use another form of security as the deposit but this can make the process more complicated.
How much do Auction Finance loans cost?
Auction finance is more expensive than traditional mortgages as they are a specialist form of finance. The flexibility of Auction Finance is what makes the costing attractive to individuals purchasing at auction, for example:
- No repayments (Rolled up) – The monthly interest is added to the loan amount, meaning you won’t make any repayments during the term of the loan. This means you will need to borrow more to exit the bridge as the loan amount would increase each month.
- Serviced – You will make monthly interest only repayments to the lender. This is safer than rolled up interest as the total loan amount needing to be redeemed won’t change.
- Retained – The lender will work out how much the interest will cost over the term of the loan and add it to the total loan.
What sort of property can I use Auction Finance on?
Due to the flexibility of auction finance, you can use it to purchase a property that a traditional lender would not lend on. Other types of property that can be used as security are:
- Residential Property (typically to break the chain)
- Commercial
- Land
- Unmortgageable Properties
- HMO’s
What is an Exit?
This is the most important consideration when deciding ifAuction Finance is right for you. Basically, the “Exit” is how you repay the loan. Typically, exiting Auction Finance would include:
- Remortgage – You would remortgage to a traditional lender.
- Sell the property – Providing you had sufficient equity in the property you could sell it to repay the loan
- Refinance another asset – if you own a portfolio, you could remortgage one or more of your properties to repay the loan
What happens if I can’t repay the Auction Finance?
This is a real risk and will result in serious financial difficulties that could lead to repossession. You should always take professional advice from a Mortgage Broker before arranging Auction Finance to make sure you know all the risks.
Can you help me arrange Auction Finance?
Yes, our Specialist Lending Team can help you with all types of Bridging Finance.