If there’s one thing you need to be before stepping into an auction, it’s to be prepared. It’s not as simple as bidding for a property and just winning it over, you need to be in a position that your finances are in order. If your organisation is there, then the rest can run smoothly… but what happens when you need finance quick and how can you best finance an auction property?
How to finance auction properties? When it comes to financing an auction property, you have a few options including bridging finance or a mortgage. Both of these are financial lending methods, but a bridging loan lets you move quicker to get the auction purchase completed.
In a brief definition, a mortgage is a money lending solution, set with an agreement of a repayment schedule. Bridging is another money lender, but for the purpose of those wishing to purchase a new property before being able to sell their current one. Bridging could potentially allow slightly more flexibility if you’re unable to get a mortgage but both these options will be defined in more detail.
Prior to all of this, running through the auction process itself can help determine how things are going to run.
The auction process
As stated previously, preparing for an auction will really work in your favour. Most auction companies will have their catalogue available up to a month beforehand, which gives you plenty of time to shop around.
By doing so you can take multiple factors into consideration such as what work it may need, what council tax band it is, energy efficiency and whether you feel it requires a home survey.
Also, worth noting, is any legal documentation that may come along side it. Everyone is different and will have their own deciding factors, but by doing a little background research can help with determining what sort of money you will need for a purchase.
When it comes to putting an offer on a property, most auctions will require a 10% deposit put down on the day, followed by the further 90% within 28 days. This is why it’s vital to discuss with a lender beforehand, to ensure your finances are in order.
This 28 day period is where problems can occur due to the length of time it takes to set up a traditional mortgage. This is how bridging finance can help, as sometimes the lending decision can be made in a very short period of time, letting you finance and make the auction property purchase.
In an ideal world it would be easier to stay within your budget, as if you go too far above and your lender doesn’t provide you will be left in a funding gap. A bridging loan would help resolve a funding gap, but just to help with a better understanding, defining the outline of a mortgage and its purpose will also help to see the key differences and why bridging is beneficial.
What is a mortgage?
Your average mortgage can be described as a 25 year or so financial lend, to fund a property or land. 25 years is only a rough figure, as many can be longer or shorter, depending on the repayments. A mortgage is a secured loan, which will be in place until your property is paid off.
To apply for a mortgage, the process is somewhat intrusive. Mortgage lenders want to be sure you are able to afford the repayments, taking all factors of your lifestyle into consideration. Factors will include the likes of your income and all your outgoings, disposable included.
Mortgages comes in many forms such as:
- Fixed rate
- Discounted rated
- Interest only
- Capped rate
- Standard variable rate
Although there are many options here, when it comes to financing an auction property, this is where things may become difficult.
Mortgage lenders are hesitant to lend on auction property and only some will meet the criteria. When it comes to bidding, a mortgage lender will generally only lend out what the property is valued at, rather than what you have bid for it.
Therefore, if your bid is over what the lender sees as the value, the money may not be up for negotiation and you could risk losing your deposit. In addition, the biggest pressure of an auction is the time restraints. Will a mortgage lender be able to work within a limited 28 day period?
And this is where bridging comes in.
What is bridging finance?
As previously stated, bridging is a financial lending solution which covers a gap between two transactions (you can read more about it here). Say you want to buy a new property but haven’t sold your current one, bridging will lend you the money temporarily until your property is sold, which makes it perfect for auction funding.
The bridging finance application is much quicker than that of a mortgage, sometimes only taking 10 days, being ideal for the auction time process.
The application itself is not as in-depth as a mortgage but will still require enough financial evidence in order for it to be accepted. The lenders typically take your current/previous property as collateral; therefore, you already have a backup for the repayment.
Bridging is relatively short term, with an average of 3- 6 months between, although some may stretch up to 18 months. This always encourages the sale of the previous home from the individual bridging. A standard offer for lending usually comes in two forms, to make interest only payments each month, whilst trying to sell, or instead you have the option to pay a lump sum after the initial loan is paid off, post selling the property.
In this sense bridging finance gives you the flexibility you require, prior to investing in an auction property.
As mortgages stand, most only offer a lend to a property that is habitual to live in. Many auction properties are up for a reason, therefore may need a little TLC before you can consider a move. Bridging allows you to borrow the money, without having an explanation for the condition of the property.
In addition to this, if you were to choose the lump sum option at the end, without a payment each month you could afford to do up your new home instead of worrying about the finances at present.
This is why bridging could be an ideal resource when it comes to finance auction property.
Need advice? If you want to know more about how to finance auction properties please contact our specialists today. They will be able to give you an idea of what’s possible in just a few minutes.
Do you have to pay cash for an auction house?
Generally speaking, you will be required to have a deposit at the auction to pay on the day. If you have the money in its entirety then this avoids any interest charges further down the line. However, you are not required to make a full payment on the day and the financial options going forward are up to the buyer.
Do you need pre-approval to bid at an auction?
This is a necessity when considering an auction. If your lender approves before the auction, then it allows you more time to research and to negotiate how your finances are going to pan out. Without speaking to your lender, you may run the risk of loss of deposit if you bid too high. In any monetary situation, it is always best to speak to a financial advisor before both buying a new property, and borrowing a lump sum of money.