Many buyers new to property auctions assume that they must be prepared to pay the full purchase value in cash – but the fast-growing interest in auctions means there are more and more financing solutions.
A lot depends on the type of property you'd like to buy since some high-street banks are reluctant to offer mortgage lending on homes they deem 'unmortgageable'. That usually refers to a property that, in its current condition, isn't watertight or doesn't have a kitchen, for example.
However, specialist auction finance products designed for auction purchases and lenders familiar with the auction process can often assist.
Key Takeaways
Explore Auction-Specific Financing Options - Be aware that traditional mortgages might not be suitable for auction purchases due to timing constraints. Instead, consider specialised auction finance products like bridging loans, which are tailored to meet the quick payment terms required at auctions.
Prepare for Financial Flexibility - Secure an agreement in principle before attending an auction. This agreement should cover a ceiling value, providing you the flexibility to adjust the final loan amount based on your successful bid, ensuring you can meet the auction's financial commitments.
Confirm Your Financial Position - Prior to the auction, confirm all aspects of your financing, including potential additional costs like stamp duty and legal fees. Ensure your lender includes these in your loan value if necessary, and verify that your deposit source complies with anti-money laundering regulations.
Do Auction Property Mortgages Exist?
The primary reason conventional mortgages aren’t well suited to auction purchases is that these loans can take weeks to organise. As you likely know, when you secure a property at auction, you normally need to pay the deposit there and then, with the full balance due in roughly one month.
Therefore, applying to a bank, waiting for a survey and passing through underwriting can take far too long and wouldn't provide the financing you need to comply with the auction sale terms.
Fortunately, there are solutions, which might include short-term financing, such as a bridging loan, which acts like a temporary mortgage product while you arrange a lower-interest mortgage to repay the balance.
An alternative is to consider an auction finance product designed to fund the purchase of a property at auction. There are Lenders who offer these types of loans – you'll find information about this and other trusted lenders most often used by regular auction attendees in our earlier guide, How to Finance an Auction Purchase or through the adverts within our catalogue.
The best option will depend on your requirements and whether the property you intend to bid on is likely to qualify for normal mortgage financing. Although niche lenders can often consider any property, other banks will only provide funding for a habitable home.
Specialist lenders make decisions on a case-by-case basis, so they are more inclined to offer an agreement in advance of the auction day if they can see that the property presents a good investment or that the end value of the home, once modernised, will far exceed the amount borrowed.
How Does a Mortgage Work on a Property Bought at Auction?
Of course, the complication is that auctions are fast-paced and often competitive. Even though you may have an idea about the value the auctioneer expects to achieve and what you are prepared to offer as a maximum bid against a listing, that might all change on the day.
Rather than borrowing an exact value to cover the cost of the purchase, less the deposit, you need to have guaranteed lending available – with the flexibility to adjust the amount borrowed based on the final winning bid.
The answer is to arrange an agreement in principle before the auction. This agreement will usually include a ceiling value, which is the highest amount the lender is happy to offer against each property you wish to bid on.
For example, if a property is listed with an indicative value of £200,000, and you are prepared to offer up to £250,000, you might ask for an agreement in principle worth that upper limit. This would give you the capacity to borrow a slightly higher or lower amount depending on the outcome of the auction. However most Lenders will take the sale price as the Market value.
How Much Can I Borrow Against an Auction Mortgage?
As with any property purchase, you’ll need to budget for all of the costs and have your deposit ready – your lender might also need to verify the source of the deposit to comply with anti-money laundering regulations.
Along with the cost of the property itself, based on the highest amount you are willing to bid, you’ll also need to consider other outgoings, including:
Stamp duty
Arrangement fees for your loan or mortgage
Legal fees charged by your conveyancer or solicitor
Costs of surveys
Most property professionals who regularly purchase at auction already have a financial adviser and solicitor they work with. Otherwise, it’s worth sourcing independent advice before you proceed and picking a solicitor who is accustomed to dealing with auction purchases – and will complete all the necessary work within the prescribed time frames.
Every lender may have varied policies, so if you'd like to finance a property purchased at auction and include other costs and fees in the loan value, this should be clarified from the outset so you don't have any problems when you submit your full application.
Is an Agreement in Principle for an Auction Property Guaranteed?
One of the many reasons buyers tend to consult specialist lenders or use auction financing products rather than standard mortgage agreements is that an agreement in principle isn't technically guaranteed.
In short, this agreement is usually based on an initial application, where you provide a few details about the property and your financial position. Once you submit your final application, underwriters will assess the risk profile of the loan and review all the information in greater detail.
If anything has changed since the lender offered the agreement in principle, or they uncover aspects that increase their risk, they could potentially withdraw the offer. That might apply if, for example, a survey reveals something in the property that weren't previously disclosed or if you have an adverse credit rating they weren't aware of.
Finance specialists recognise the speed of the auction sales process and will usually conduct all the necessary checks before providing an agreement in principle. That offers you the assurance that on auction day, you can bid freely, with confidence that your financing is already in place and will be available in good time.
What Happens if I Cannot Finalise Mortgage Lending to Complete an Auction Purchase?
In most cases, if there are any stumbling blocks along the way, an experienced auctioneer can provide assistance and potentially negotiate with the seller to ensure a minor delay doesn’t prove disastrous.
However, if you cannot remit the payable balance on time, you may lose the deposit originally paid, usually 10% of the purchase cost.
Our advice is always to ensure you have confirmed funding in place in advance and have discussed the final application process and turnaround times with your chosen lender. Alternatively, read our guide on how to buy a property at auction here.
