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Auction Finance

Purchasing a property at auction but don’t have the time for the formalities of a traditional mortgage? Then this is just the guide for you as we discuss all about auction finance.
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Auction finance in its various forms is a specialised funding solution designed for individuals and investors participating in property auctions.

When engaging in property auctions, buyers often need quick access to funds to secure their winning bids. 

That’s when auction finance serves as a practical solution with short-term loans, often secured against the property being purchased. This allows buyers to swiftly complete the transaction and gain ownership of their newly purchased asset. 

Hence, today, we’ll discuss the various aspects of auction finance, including eligibility criteria, loan terms, interest rates, and the application process. 

By exploring this financial tool, we aim to empower you with the information to support you to make informed decisions and seize valuable opportunities. 

What Is Auction Finance?

A type of bridging loan, auction finance is tailored for individuals engaged in property auctions. A key advantage lies in its remarkable speed of arrangement, often outpacing conventional bridging finance.

This rapid accessibility is especially advantageous for auction buyers due to the stringent payment deadlines that follow a successful bid. 

Usually, in the UK, winning bidders must provide 10% of the purchase price immediately after the auction’s conclusion, with the full payment due within 28 days. Plus, the highest bidder must provide a non-refundable deposit on auction day. 

In such scenarios, traditional financing options like mortgages prove impractical due to their time-consuming application and approval processes. 

Hence, auction finance becomes a suitable option, ensuring buyers meet these strict payment deadlines and secure their acquisitions promptly. 

How Does Auction Finance Work?

How Does Auction Finance Work

Auction finance, like traditional bridging loans, operates on a short-term basis, with funds potentially disbursed within 14 days upon application. However, this depends on an adequate deposit (or alternative property/asset as collateral) and a well-documented exit plan.

The exit strategy fundamentally outlines how you intend to settle the debt before the term concludes. It usually involves either remortgaging or selling the asset in scenarios involving property or land. 

Auction finance providers generally require evidence of its marketability or a pre-approved agreement in principle to ensure a viable exit strategy is in place.

Compared to mortgages, auction finance boasts significantly shorter term lengths, typically spanning 1-24 months, although some lenders may extend this to 36 months upon agreement.

How To Apply for Auction Finance

Once you’ve identified a property for bidding and set aside the necessary deposit, you can approach an auction finance lender to request an agreement in principle. 

This assessment determines your eligibility for the required funds and applicable interest rates.

Here’s what you should do to enhance your chances of approval:

  • Prepare Documentation: Ensure you have proof of your deposit, an exit strategy, and a valuation report ready.
  • Check Credit Reports: Be prepared with your credit reports, as most lenders will conduct a credit check.
  • Contact An Auction Finance Broker: Engaging with a specialised auction finance broker before starting the process can greatly enhance your success rate.

Auction Finance Eligibility 

1. Deposit

While most lenders specify minimum deposit requirements, a higher deposit enhances your likelihood of obtaining a low interest rate and a great selection of available lenders. 

2. Property Experience

While first-time buyers can access auction finance, having prior experience in similar property transactions and a strong track record can enhance eligibility. So, existing property ownership can serve as additional security, bolstering your creditworthiness.

3. Credit History

A clean credit history improves your chances, but bad credit becomes problematic if it jeopardises the exit strategy or raises initial concerns about you as an applicant during your application. 

4. Exit Strategy

A strong exit strategy will increase your chances of securing favourable auction finance terms. This involves demonstrating that the property you’re purchasing can be sold or remortgaged at the desired value. For development projects, having relevant experience is advantageous.

Auction finance in most cases falls under unregulated borrowing, as it is a common method used by property investors. 

If your case is complex, there may still be lending options available who offer flexibility in the assessment process.

Auction Finance Process

Auction Finance Process

Auction finance, while generally faster than conventional avenues like mortgages, necessitates thorough preparation before entering the bidding process. The typical sequence of events in auction finance is as follows:

1. Lender Selection

Prior to engaging in any auction activities, the first step is to identify a suitable lender. This choice is vital as lenders have varying criteria and preferences regarding the properties they finance.

2. Due Diligence

Once you’ve identified a property you wish to acquire at auction, it’s imperative to conduct due diligence. This involves a comprehensive examination of the chosen property, taking into account its condition, market value, and potential for profitability.

3. Provisional Acceptance/Pre-approval

Before the auction itself, it’s advisable to seek pre-approval or provisional acceptance from your chosen lender. This step not only provides you with financial clarity but also mitigates the risk of being left without funding in the event of a successful bid.

4. Winning The Auction

The next phase occurs at the auction itself. If your bid is successful, having already secured provisional financing dramatically streamlines the purchase process.

Although it is possible to seek financing after winning an auction, we do not recommend doing so due to the risks involved. Planning and securing financing beforehand allows for more comprehensive due diligence and an increased likelihood of securing favourable terms.

Auction Finance Pre-Approval Process

Lenders will evaluate various factors, similar to mortgage applications. This assessment includes credit checks, affordability, property valuation, etc. 

Even if you have a less-than-ideal credit history, some lenders may still consider your application, making it essential to consider this financing option on time.

A decision in principle from a lender will allow you to estimate your budget. Note that the loan you qualify for might cover only a portion of the property’s cost, with the deposit, making up the remaining balance. 

For instance, if 90% of a property valued at £100,000 is funded by the lender, you must contribute a £10,000 deposit. 

This example establishes your budget at £100,000, though lender-specific terms can vary, and your lender/advisor will clarify the details.

After The Purchase

After securing a bid on a property, you have a limited time frame, often 2-3 weeks, to finalise the transaction. The deposit amount may vary based on the auction’s terms, but it is usually imperative to pay 10% of the property value which is often non refundable. . 

Once the auction finance is approved, they will work with your solicitor in an ideal world facilitating a smooth and timely completion of the purchase.

Auction Finance Interest Rates

Bridging loans and auction finance share similar interest rates and are typically intertwined. That said, auction finance lenders generally employ different interest payment methods:

  • Rolled-up Interest: Monthly interest payments are bypassed, and instead, interest accumulates and is paid in full when the term concludes
  • Monthly Payment: Interest is repaid every month, with the full loan settled at the term’s end

Overall, interest rates usually range between 0.5 and 3% per month, depending on the chosen deal.

FAQs

1. What type of property can you buy using auction finance?

  • Agricultural properties
  • Residential
  • HMOs
  • Land (with and without planning permission)
  • Commercial
  • Unmortgageable properties
  • Mixed-use

2. Can you get 100% auction finance?

Obtaining auction finance without a deposit is possible but in very rare, rare circumstances, but it typically requires additional collateral elsewhere such as a legal charge on another property.. This commonly involves using one or more of your other properties as security for the loan.

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.

Our goal is simple - to provide most up-to-date and accurate mortgage information to make your mortgage journey as stress-free as possible. Have a question? Fill up the quick form and one of our mortgage advisor will connect with you.

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