Buying a property at auction can be an exciting opportunity to acquire unusual, high-potential homes, developments or investments. However, as a buyer, you must be prepared to proceed immediately, with a deposit payable once the auction concludes. So how will you fund your auction purchase?
Fortunately, there are numerous finance options, with a growing proportion of providers and lenders offering specialist auction finance alongside other solutions, such as financing your current properties.
The key is to ensure whichever route you select offers financing within four weeks of the auction date to avoid any delays or issues that could put your new property ownership at risk.
Disclaimer: The information provided in this article is for general informational purposes only and should not be considered professional financial advice. Clive Emson Auctioneers are not licensed financial advisors, and the content of this article should not be construed as creating any kind of advisor-client relationship. Readers are advised to seek the services of a qualified financial professional or advisor for personalised advice tailored to their financial situation.
How Can I Finance a Property Purchased at Auction?
A lot depends on the value of the lot you wish to buy and whether you have a deposit available. You will need to pay a 10% deposit on the day to finalise the sale, exchange contracts and secure the property. You can read more about the property auction process here.
Whilst cash purchases are relatively common for auctions, finance arrangements are just as popular. Auction financing designed for this purpose is often ideal since it is structured as a short-term loan and offered by providers who are familiar with the auction process. Many lenders will consider private, professional and commercial applicants.
Let’s look at some of the popular options for UK auction property buyers:
- Commercial Acceptances:Â part of the Close Brothers Group, this lender offers decades of expertise and independent property valuations with guidance throughout the buying process.
- DMI Finance:Â tailored auction finance loans against residences, commercial property, developments and land, with high LTV products available if you need to borrow the majority of the purchase value.
- Life Financial Solutions:Â a lender with several lending solutions including bridging finance, development and commercial lending products depending on the type of property you wish to purchase at auction.
- Together Money:Â a UK lender with 15 years of experience offering auction financing, including against properties otherwise considered unmortgageable, ex-council properties and apartments in high-rise buildings.
Please note that this is a small selection of the most frequently used lenders, and there are many others that may suit your objectives and requirements. Please click here to see our current advertisers.
It is also advisable to ensure any lender or auction finance provider you approach is FCA-authorised and regulated and to seek independent advice if you need help organising or applying for lending secured against a property.
A Step By Step Guide to Applying for Auction Finance
The first step is always to conduct research, whether you have a particular property you are interested in bidding on or are considering your options in terms of future property purchases.
Much of the lending assessment process will depend on what you’d like to buy, at what value, your affordability, and the deposit you have available to use as a down payment. In general, the greater the deposit and the lower the Loan to Value ratio, the easier it may be to secure financing, but this may not always be the case.
Buyers may also wish to create a shortlist of properties within an upcoming auction to submit an initial application to evaluate the lending they may be eligible for.
Applying for Provisional Auction Finance Acceptance
Most lenders will provide an initial offer to lend, much like an agreement in principle on a conventional mortgage. This process means the buyer can bid with confidence that they have the financing in place, provided none of the details of the application change, and they are aware of any maximum borrowing limit imposed.
Lenders deploy varied assessment policies, so they might conduct:
- Valuations of the property
- Credit history checks
- Income assessments
- Business case evaluations
- Rental income appraisals
Regulated lenders have a responsibility to lend only to applicants who can afford to make the agreed repayments, so this approval process is necessary for any auction finance borrower.
Loan providers will also assess the potential income or rental revenue the property will generate if you are applying for auction finance to purchase a commercial premise, a rental unit or any other type of development property intended to return a profit.
Setting Auction Finance Lending Caps
A lender will often provide an indication of what they are prepared to offer based on the property you are interested in bidding against depending on the eventual sale price. While there is no way of knowing whether you will be the successful bidder, this process means you can bid with prior knowledge of any upper limit.
For example, you may have initial approval for auction finance of between £275,000 and £300,000 with a pre-agreed deposit and interest rate. You can bid up to the maximum value, including your deposit and the auction fees.
Some lenders are more flexible than others or will be happy to lend a more variable value, especially if you have a strong business case or have previously borrowed auction finance and made the repayments on time.
You can also apply for an initial lending agreement to see the maximum you may be able to borrow and then use this to refine your shortlist of properties to bid against that are likely to fall within your price range.
Finalising an Auction Finance Loan
Once you have attended an auction and placed the winning bid, you will need to pay the deposit straight away. The standard timeframe for completion is four weeks, although any variations in this will be included in the terms of sale within the legal pack.
You will need to notify the lender that the auction sale has been successful, instruct your solicitor, and submit a final application for the exact amount you wish to borrow.
Can You Buy a Property at Auction With a Mortgage?
As we’ve indicated, there are multiple potential ways to finance an auction property purchase, and bridging loans and auction finance are simply the most popular solutions since these products and lending structures are designed with the auction time frames in mind.
In some situations, it might be possible to finance the purchase with a mortgage, with the caveat that these agreements tend to take significantly longer to arrange and may not be suitable.
However, buyers may have sold a previous property or remortgaged another residence to raise the capital for the deposit or full purchase value and could have a pre-agreed agreement in principle with a lender who is prepared to move quickly. They can also look at alternative financing solutions to ensure their auction acquisition goes smoothly.
If you’re looking for more information on how to purchase a property at auction, read our guide to buying land and property at auction here.Â
About the Author:
Sam Kinloch
Sam’s career in the dizzy world of property auctions began when he hung up his chainsaw and headed in from the forest. Joining the team in 2003 Sam now sits on the Board of Directors and has been instrumental in the adoption of online auction services. Out of the office you can find him flying around the velodrome or sipping coffee at a local café.