How does Auction Finance work?

How does Auction Finance work?

If you go to buy a property at auction, you will be required to pay a 10% deposit on the day once you have won the auction and the balance within about 28 days.

You might think you can arrange a mortgage this quickly assuming the property is mortgageable (meaning it must have a functioning kitchen and bathroom which many repossessed properties in an auction may not have). However, this is faster than a bank can move and too great a risk to take with your 10% deposit. The route taken by many is to arrange Auction Bridging Finance

The first thing to know about how Auction Bridging finance, is that fast; it can usually be arranged in a matter of days. Secondly, up to 70-75% of the purchase price or Open Market Value (usually whichever is lower) is available so you will still need a deposit of 25-30% in total.

 Before the auction, speak to a finance broker about your likelihood of getting finance on the property you are buying. This will depend on:

  • The location of the property
  • The nature of the property
  • How you intend to repay the bridging loan
  • Your experience in these kind of transactions
  • How much you want to borrow
  • Your credit history (to a limited degree only though)

 Based on the above you should have an Offer in Principle as you head to the auction.

 After you have purchased at auction, the Bridging firm will arrange a formal valuation (if required) and this will lead to a formal offer for your finance.

 Specialist solicitors who are familiar with how to get auction finance then step in and complete the paperwork.

 The typical costs for Auction Finance are:

  • Most lenders charge and Arrangement fee of approx 2%
  • If you use a broker, the will charge a fee, typically 0.5-1%
  • It is standard that you pay the Lender’s legal and valuation fees
  • You may also wish to engage your own solicitor which would be at your expense

 All told the entire process post-auction should take no longer than 7-10 working days and you should have finance in place for 6-12 months, enough time to complete and renovations required to the property and either refinance it or sell it on.