What is auction finance? Auction Finance, is the term used to describe how you fund a property purchase made at auction. It is a specific field of finance due to the standard terms of property auctions which dictate you must;
- Pay a 10% deposit on the day of the auction once
you are the winning bidder
- Pay the balance within 28 days
Typically banks don't/can't pay out mortgages within 28 days due to the stringent surveys, legal checks and paperwork they require before releasing funds so one of the more popular ways of financing an auction purchase it to get a Bridging Loan.
A Bridging loan can be arranged quickly (7-10 days), is flexible with credit histories (much more so than a mortgage) and is usually on a 'rolled-up' basis. This means you don't have to pay monthly interest rather all costs are rolled up to the very end of the loan and all paid off at once, thus helping your cash flow.
Preparation is key here though and so before you go to the auction we strongly suggest you speak to a finance broker about what your proposed transactions so it can be determined if you would qualify for a Bridging Loan. Qualification depends on:
- The nature of the property (buildings preferred
over land and commercial over owner-occupied residential for example)
- The location of the property (isolated or
unpopular locations that may prove difficult to sell in the event of a default
are more difficult to get finance on)
- Your exit strategy i.e. how you intend to pay
off the Bridging loan when it's completed
- Your credit history (to a lesser degree)
The standard costs for an Auction Bridging Loan are:
- All Lenders charge an Arrangement fee, usually
of about 2%
- If you use a broker, their fee is typically
0.5-1%
- Market convention dictates the Borrower pats the
lender's legal and valuation fees
