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How to finance a property auction purchase

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Buying at auction is a fast-paced and often exciting way to secure a property, and the interest in buying via this method has grown significantly in recent years.

However, it comes with significantly tighter deadlines than a typical residential purchase. Whereas standard transactions can take several months, auction buyers are usually required to complete within 28 days.

While some buyers are able to purchase with cash, this isn’t always an option. In these cases, auction finance can be a powerful alternative, allowing buyers to move quickly when traditional mortgage timelines don’t align with the auction process. 

With the right planning and financial strategy, auction finance offers the flexibility needed to act fast and make the most of auction opportunities. Here’s how it works:

What is auction finance?

Auction finance is a type of bridging loan – a short-term loan designed to bridge the gap between buying a property and securing long-term funding, such as a mortgage. They are designed to be arranged quickly, so that a borrower can complete their auction property purchase within the 28-day window.

Typically, a bridging loan is secured against the value of the property being purchased, but it can also cover additional costs, including legal fees, stamp duty, and auction fees.

A bridging loan can be put in place to buy residential property, as well as commercial assets and land. They are ideal for properties that are uninhabitable and which therefore don’t meet regular mortgage lenders’ criteria. In this scenario, a bridging loan will allow buyers to complete on their purchase, complete the required refurbishment works, and then refinance onto a traditional mortgage.

Arranging auction finance

Auction finance should be arranged before auction day. Although it is faster than a standard mortgage, there is still an application process involved.

Buyers should also appoint a solicitor ahead of the auction who will act for you on the purchase, as well as being able to review the legal pack to ensure that there’s nothing which would prevent a lender from granting the funds you require.

Borrowers will need to:

  • Complete an initial application
  • Undergo a property valuation
  • Demonstrate a viable exit strategy (i.e. how they intend to repay the loan)

If approved, the lender will issue an offer outlining the loan amount, interest rate, and repayment terms. Once agreed, the funds can be used to complete the property purchase quickly and without delays.

Repayments

After completion, the bridging loan must be repaid within the agreed term. Buyers may choose to:

  • Refinance with a traditional residential or buy-to-let mortgage
  • Sell the property and use the proceeds to repay the loan

Interest on bridging loans can either be paid monthly or "rolled up," meaning the buyer repays the full loan amount plus interest in one lump sum at the end of the term.

It’s important to note that bridging loans usually carry higher interest rates than standard mortgages, so understanding the full cost of borrowing is crucial before proceeding. 

Further information

Contact Robin Howeson

 

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