Understanding how auction finance works

Buying a property at auction can be a worthwhile but challenging experience, especially when it comes to securing funds. The standard mortgage process is not suitable for buying a property under the hammer, due to the short timescales involved. This is where auction finance comes in.

Auction finance is a funding solution for buying property at auction. It is a type of bridging loan that allows you to quickly access funds to purchase an auction property, allowing you to benefit from a great property deal. 

If you are unclear on how auction finance works, then this guide is for you. We highlight the practicalities, the pros and cons, and the types of properties you can buy and how the application process works.

What is auction finance?

Auction finance is a type of bridging loan that you can use to buy properties at auction. Auction finance aims to "bridge" the time gap between having to settle all costs with the auctioneer and the arrangement of more permanent finance, such as a mortgage. 

You should arrange auction finance ahead of the auction date, allowing you to be clear on your maximum budget so you can bid with confidence.

Benefits of auction finance

Below are the benefits of using a bridging loan to buy a property at auction:

Fast access to funds

Time is of the essence when dealing with auction property purchases. On the day of the auction, you will need to have 10% of the property value to place as a deposit when you sign the contract. You will then need to complete the full payment, usually within 28 days of the auction date. 

Auction finance is offered by bridging lenders. These finance providers understand the time-sensitive nature of auction transactions. They can facilitate the swift release of funds, often within a few days. This allows you to quickly act on auction opportunities.

Be aware that not all bridging loan lenders are set up to help with auction finance. By working with our broker team, we can identify lenders best placed to meet the tight timeframes of auction houses. 

Can you buy an uninhabitable property?

Traditional mortgages require that the purchase property be habitable. This means that the property will need a functional kitchen and bathroom and be structurally sound.

So, if you are buying an auction property in need of significant refurbishment, this is another reason why a mortgage is unsuitable, as well as the short timeframe you have.

Funding any renovations

Auction finance bridges the gap between the deposit you have and the purchase price of the property, which is arrived at during the auction.

If you are renovating, you will need to cover the costs of the works yourself, typically this will not be covered by the borrowing.

How does auction finance work?

Understand the eligibility requirements of lenders and the application process:

Eligibility criteria for auction finance

The specific eligibility criteria for auction finance will vary depending on the lender. The main considerations will be whether you have a deposit and a strong exit strategy. The deposit for auction finance is typically a minimum of 25% of the property value. 

An exit strategy is how you plan to repay the auction finance. Your exit strategy can be to sell the property and use the income from the sale to cover the loan.

You can also keep the property to let it out (if it is a home) or keep the property and either let it out or run your own business from it (if it is a commercial property. You would either ‘exit’ to a  buy to let mortgage or a commercial mortgage, depending on the property type. 

Lenders may also look at your income, credit history, the property value, and other financial information to determine your eligibility.

The auction finance process

The auction finance process should begin before you attend the auction. As a prospective bidder, you should secure indicative terms (a statement of intent to lend you the money, assuming all factors of the deal remain the same) from a lender before the auction.

This gives you a clear idea of your budget and can speed up the financing process after a successful bid; it will also mean you know the maximum amount you can bid to secure the property.

Start by researching various auction finance providers to find one that fits your requirements. You can compare the interest rates, fees, loan terms, and reviews from other borrowers. Once you have found a lender that matches your requirements, you can then complete an application.

Our specialist bridging loan broker team will do all this work for you, making sure you have the best deal from a wide range of lenders. We will take most of the work out of this process, saving you time and energy.   

After a successful application has been made, the lender will provide you with a formal offer. This will detail the terms and conditions of the loan. After the loan is agreed, the funds can be released.

Once you have won the auction bid and paid the deposit on the property, you can then use the auction finance to make the full payment - which is often within 28 days.

Top tips for getting auction finance

Securing auction finance involves a strategic approach. 

Here are a few tips to help you successfully navigate this process:

• Prepare early: Start the process well ahead of the auction date. This allows time to secure lender terms. It also allows you to plan a strong exit strategy that can help secure your loan. 
• Property valuation: If you are new to property and unfamiliar with potential pitfalls, consider having a valuation and a survey done on the property before the auction. This could save you buying a property that will cost you money in unexpected costs. Be aware though that a lender will require the property to be surveyed, which you will be charged for, to ensure the property value and loan to value is accurate.
• Get expert assistance: Auction finance brokers like our team at Commercial Trust can help make the process easier to obtain auction finance. We have access to a wide range of lenders, ensuring that you get the best possible deal for your circumstances. We will also make the application for you and get it through to the point the funds are paid.

Comparing auction finance to "traditional" mortgages

Traditional mortgages, such as a buy to let or commercial mortgage, are a common form of long-term financing for investment property purchases. The approval process for a traditional mortgage can beis lengthy in comparison with auction finance. They often require a detailed assessment of the borrower's credit history, income, and the condition of the property.

Auction finance is a short-term funding solution. It provides quick access to funds, which is essential given the tight payment timeframe attached to buying property at auction. 

Auction finance also allows for the purchase of properties that may not qualify for traditional mortgages, such as those in need of significant renovations. However, this loan usually attracts higher interest rates than traditional mortgages.

The thing to bear in mind with auction finance is that interest rates are higher than traditional mortgages. This is why it is important to have a clear plan to pay it off within a short turnaround time (within months, not years as you would a mortgage).

What types of properties can you buy with auction finance?

Auction finance allows you to buy a diverse range of properties. These include residential and commercial properties, uninhabitable properties, and below-market value properties for flipping. You can also purchase land for property development.

The flexibility of auction finance makes it possible to buy properties that traditional mortgage lenders might avoid.

Is auction finance the right option for you?

Auction finance can be an excellent resource if you need quick access to funds, or if the property you aim to buy does not qualify for a traditional mortgage. You should consider the higher interest rates before choosing this financing solution.

Commercial Trust offers auction finance, get in touch with an expert today

Get fast and easy access to auction finance with Commercial Trust. 

We work with a wide range of auction finance lenders in the UK, which means we can get you a great deal. Our team of experts are also available to guide you through the details of auction finance. What’s more, we can simultaneously arrange finance to pay off the loan, if you are keeping the property.

Get in touch to discuss your auction finance needs today.

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