What is Auction Finance?
Auction finance, a type of bridging loan, is a short-term loan that can be arranged much faster than a standard mortgage, to buy property at auction. It allows an auction buyer to complete a transaction in the strict timescales set by the auction house, which is typically within 28 days after exchanging contracts. A buyer pulling out or not having the finance required to complete the purchase on time risks losing their deposit (usually 10% of the sale price).
Applying for Auction Finance
Prior to attending and bidding at auction, it is advised to get a Decision in Principle (DIP), also referred to as Agreement in Principle (AIP), to know how much you can afford to borrow and the type of properties you can bid for. Getting a DIP can be a quick and straightforward process if you can provide the auction finance broker with the following information:
- Information about the borrower, directors, and experience
- Loan requirement, deposit, and source of funds
- Security details
- Property type, location of the property, purchase price and market value
- Exit strategy i.e. how you intend to repay the auction bridging loan
Following a successful bid and securing the auction property with a deposit, the bridging lender will carry out further due diligence, credit checks, income verification, instruct a valuation, issue a formal offer letter and instruct specialist bridging finance solicitors to draft documentation and register security before drawdown of the loan.
Auction Finance costs and Features?
You should expect to pay an arrangement fee of 2% and interest rates from 0.55% per month over 6-12 months. Loans start from £25,000 and you can borrow the lower of 70-75% loan to value (LTV) or purchase price. 100% auction finance is possible with additional security. In most cases, there are no early repayment charges for auction bridging loans which means you can reduce the amount of interest by repaying the loan early. Other fees to consider include valuation fees, legal fees (the borrower is responsible for the lenders legal costs also) and administration fees at the start and end of the loan.
Terms, conditions, and lending criteria vary widely between lenders. Contact a specialist auction bridging broker to turnaround an auction purchase quickly and on terms that is right for you.
Benefits of Auction Finance?
- Fast to arrange. A specialist auction bridging lender can have funds in your account within 7-14 days, ideal for auction deadlines – this protects your deposit and provides the funding needed to complete the auction purchase in time. Using a bridging loan broker can speed up and reduce the hassle of auction buying process.
- You can borrow against most types of property with auction finance including residential, commercial, semi-commercial, mixed-use, industrial, land, of non-standard construction and not mortgageable under standard mortgage terms.
- Can fund the acquisition and cost of building work – Professional landlords can use an auction bridging loan to buy property cheaply to refurbish before finding a tenant and refinancing onto a traditional buy-to-let mortgage. Similarly, an experienced developer can carry out significant changes to a property before selling at a profit.
- Can finance 100% of the purchase price of an auction property, subject to additional security being provided, for example, by offering a first or second charge over another property or multiple properties in your portfolio.
- Ideal for experienced investors and developers to purchase a potential development site using a pre-planning auction loan that allows time to secure planning permission before converting to a development loan to buildout and sell.
- Available to higher risk borrowers including first-time buyers and borrowers with adverse credit if the lender can get comfortable with the borrower, security and exit strategy.
- Interest calculated to suit cashflow using the following methods:
- On a rolled-up basis where interest added to the loan and repaid at the end plus the principal debt. This method is slightly more expensive as interest compounds during the term. However, it maximizes the amount you can borrow at the start and helps with the cash flow.
- Retained interest calculates the interest due over the entire term of the loan and deducted at the outset. This method keeps interest costs down and without needing to make monthly interest payments.
- Serviced interest is paid when due on a monthly basis. This is the least common as it can put pressure on cash flow.
The downside to auction finance is the overall cost of borrowing is tend to be higher than high street and buy-to-let lenders. It is therefore important to not overrun or default on the facility where the costs outweigh the short-term benefits of the product.
Extra costs at Auction
In addition to the lender’s costs, deposit, stamp duty and commercial property elected for VAT, a buyer should budget for extra charges and fees payable at auction, following a successful bid. These extra costs can be found in the auction catalogue, property details or the legal pack of the auction lot. They can include some or all of the following:
Administration fee is paid to the auctioneer and cover the costs of the sale. It is payable on exchange of contracts and represented as a fixed amount from £300 – £1,500 plus VAT.
Buyer’s premium is paid directly to the auctioneer. If applicable, the premium is usually 1-5% of the final auction price or a fixed minimum amount subject to VAT.
Contribution to seller’s costs is the amount you pay to cover the costs incurred by the seller. It can include the cost of producing the legal pack for auction, conveyancing fees, documentation costs and special clauses with costs implications that the seller chooses to pass on to the buyer.