Auction Finance – finance solutions for auction properties – how a bridging loan can help you capitalise on opportunity
Property auctions can be a treasure trove of opportunity for those looking to grab a diamond in the rough and shine it up to turn a profit. When buying a property at auction, you’re typically expected to put down a 10% deposit on the day of winning your bid, and to then pay the remaining 90% within 28 days. For those without significant funds at their disposal, a traditional mortgage is the go-to when purchasing a property- but these mortgages take time to complete, and with such a short period of time to pay the remainder, this is where a bridging loan can come in handy.
What is a bridging loan for auction finance?
In the context of an auction, a bridging loan, as the name suggests, is a type of short-term finance product that allows you to “bridge” the gap between purchasing a property, renovating and selling on (or taking out a traditional mortgage). The criteria for a bridging loan vastly differs from traditional mortgage types, with lending decisions being more based in the property, the plan you have for it and your eventual exit strategy (I.e. how you’ll pay off the final balance) as opposed to a lending verdict based on your credit history and affordability.
With just a month window to gather the funds to pay the remaining 90% balance (after winning the bidding and laying down your deposit), speed is of the essence -luckily the application process for a bridging loan tends to be relatively quick, which is ideal for the keen-eyed auctioneer looking to capitalise on an auction gem.
The advisers at Clever Lending can give peace of mind by reviewing your requirements before going to auction, give you an idea of fees and costs before making a commitment. This will give you confidence at the auction that you should be able to get the required funds.
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Auction finance arranged
We are a broker, giving you access to the whole of the market for short-term finance. We deal direct with the lender and handle the application process for you.
Bridging loans are widely multipurpose and can provide short term finance for variety of situations;
- Securing a property before completing the sale of your existing property, don’t lose your dream home
- Broken sale chains - bridging the gap between purchases if a seller or purchaser withdraws
- Auction purchases - quick completion timescales
- Renovation - a traditional mortgage may not be available until the works are complete
- Below market value - enabling you to take advantage of the open market value of the property
- Un-mortgageable properties, for example if there’s no kitchen or bathroom
- Refurbishment projects to sell or let
- Change of use - if changing the purpose of a building
Interest rates on bridging loans are often charged monthly as opposed to annually, which can result in the interest rates being more expensive than a traditional mortgage – but the trade-off shows with the short-term flexibility of the loan, providing terms lasting from 1 to 24 months (depending on the project) -meaning you’re not tied in for longer than you need to be.
Whereas the interest on bridging loans is charged monthly, it doesn’t necessarily mean you have to be, which can come as a relief for property developers without a large personal cash reserve. The interest can be paid monthly, leaving you with just the balance you borrowed at the end of the term or you can roll up the interest payments and repay the loan plus interest at the end of the term, once you’ve sold or mortgaged the property.
Bridging loans also provide finance for houses that are deemed uninhabitable, unliveable and otherwise unmortgageable– which is a fairly common condition for auctioned properties to come in.
Typical rate examples for auction finance / bridge loans
| Borrow £100,000 and you would approximately pay back | |||
|---|---|---|---|
|
Interest Rate |
Interest 0.4% |
Interest 0.6% |
Interest 0.8% |
|
6 months |
£104,795 |
£106,054
|
£107,325
|
|
9 months |
£106,058
|
£107,974
|
£109,922
|
|
12 months |
£107,336
|
£109,930
|
£112,581
|
| Borrow £250,000 and you would approximately pay back | |||
|---|---|---|---|
|
Interest Rate |
Interest 0.4% |
Interest 0.6% |
Interest 0.8% |
|
6 months |
£258,431
|
£261,536
|
£264,671 |
|
9 months |
£261,545
|
£266,272
|
£271,074
|
|
12 months |
£264,696
|
£271,093
|
£277,632 |
The above is for comparative purposes only. Please check with your lender or broker for the most up-to-date information and rates at the present time.
Can I get a bridging loan for auction finance?
It’s possible for anyone to get a bridging loan for auction finance – lenders aren’t looking at your personal finances, lenders are looking at your plan and whether the end result will allow you to repay the balance owed. We have successfully sourced bridging loans for individuals, sole traders, limited companies and a wide variety of other professionals.
You don’t need a wealth of experience to become a property developer, it requires no qualifications- but you do need to crack down, do your research and prove you can complete the project at hand.
How much can I borrow?
The amount you can borrow will depend on the project you’re planning – most lenders will offer up to 75% of the value of the property, which can increase to 85% if you’re planning to renovate and up-sell.
As with most property finance, the larger the deposit, the better the lender will view the application and the better chance you have of getting more favourable rates, but it’s worth noting that it’s sometimes possible to access up to 100% LTV if you have additional security, such as another property or asset.
How much do bridging loans cost?
As with most financial products, there are fees associated with getting a bridging loan. You can usually expect:
- Lender’s fee – an arrangement charge is usually put in place by the lender for providing the loan, often around 2% of the total loan amount. Depending on the application, lenders may allow you to bundle this charge with the loan.
- Legal fees – as there are legal contracts involved, there will be legal fees. It’s important to bear this in mind when planning your budget.
- Surveyor/valuation fee – the lender will want to survey the property to ensure your plan reflects the reality of the property, which you’ll usually have to pay as part of the arrangement process.
- Exit fee – this entirely depends on the terms of your bridging loan. Some lenders will require a fee when exiting the loan, some may only ask for one if you repay early, whereas others may not stipulate an exit fee at all.
- Broker fee – finding the right financial product isn’t always easy, which is why we have specialists on hand to do the work. The right advice can make the world of difference when navigating financial territory and using a broker can give you access to rates and deals which might not be advertised on the public market.
How do I get a bridging loan to finance my auction property?
Going to a specialist broker, like the ones we have, can give you the best chance of finding the right lender to approve your bridging loan application- helping you through the process and ensuring your application is at its best to maximise your chances of success. There’s still plenty you can do to get things ready though, and while putting your application together it’s important to remember what lenders will be looking at:
The property you want to buy
Auction houses will plan and promote their auctions in fair time, providing potential buyers with catalogues of the properties (known as lots) up for sale around a month in advance of the bidding. The seller (or the auction house) will list what they think the property is worth as a guide price, with the reserve (minimum amount the seller will accept) being kept private. If you’re lucky enough to spot a decent do-er upper, this gives you time to view the property, conduct a survey (especially if considering a property that will need extensive work) and make sure you’re making a solid choice.
The amount you want to borrow
A bridging loan can create access to a fair chunk of finance- unlike traditional mortgages, where the amount is based on your income, bridging loans are calculated differently- with the amount you can borrow being based on the LTV (loan to value- the amount you want to borrow vs the value of the property, the higher your deposit, the lower your LTV) of the properties’ current value, or if renovating- its estimated value.
Your plans for the property
So, you’ve found a bargain property at auction and won the bidding. What’s next? The lender will want to see a clear and informed plan for the property before approving a bridging loan, covering things like how you intend to renovate it, what you plan to do with the property (ie residential, commercial, buy-to-sell) and how this will add the value needed to repay the loan.
Lenders will also consider your experience with property development, so if you’re new to the field, making sure you’ve prepared a team of those you’ll need (such as project managers, builders, architects and surveyors) can help reassure the lender you’re capable of carrying out the renovations required and subsequently repaying your loan.
Decision in Principle
This is where we come in, Clever Lending can talk you through the finance options, including any fees and charges that are payable. If required, we can obtain a Decision in Principle (DIP) from a lender, which means you’ll have passed the initial credit and identification checks.
Case Study
Enquiry
The customer wanted to purchase a new property, having seen a refurbishment project going to auction, they needed to arrange the finance before selling their current house.
| Loan | Rate | Product | LTV | |
| New Mortgage | £224,400 | 0.69% P/M | Fixed Rate | 70% |
Solution
We sourced a lender that accepted a security over both properties (the current and the new auction purchase). Once the current one is sold, the funds will be used to repay the bridge. The case was submitted and completed within the required auction house timescales.
As mentioned above, it’s important to conduct a thorough survey of the property prior to bidding, so you have the full scope of what condition it’s in, what work needs doing, and what kind of team you’ll need. Once the bidding is done the sale is legally binding, so if you find structural issues or other problems with the property post-sale, you could find yourself going out of budget to make the property liveable. It’s also important to be aware of any planning permissions you’ll need along the way.
Research and attention to detail is key here – there’s little point buying a property in an area where houses sell for a pittance, so getting to know the market and becoming familiar with the selling prices of other local properties can help you formulate a profitable plan.
If you’ve done your due diligence, you should know how much you’ll need to renovate the property to the standard required, and this is what needs to be laid out in your plan – what you’re doing, where the money is going, and how it’ll result in the property hitting its estimated final value.
Your exit plan
In the lender’s eyes, this will be the most important part of your application – how you plan on repaying the bridging loan. The answer to this will depend on what you plan on doing with the property once you’ve completed renovations.
If you plan to sell the property on for a profit, you would use the money from the sale to repay your bridging loan, retaining the profit or re-investing it into another project.
Alternatively, if you choose to keep the property and live in it, you could then seek a traditional mortgage to repay the loan- however it’s important to remember you would be subject to the usual affordability and credit checks.
Bridging loans can help provide specialist lending solutions for unique lending situations, so if you’re looking to begin, or continue your journey into property development, get in touch with one of our qualified specialists.
What should I do next?
You can call us today on 0800 316 2224, option 1 or complete the contact form
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Our expert will get back in touch – We can guide you every step of the way, and we’ll always keep you up to date with progress
Why use Clever Lending?
We are specialist in finding solutions for bridging finance, talking to an industry expert will mean you are getting the right information for your requirements. With a personal service and outside the box thinking, if there is a solution out there, we will find it.
