Auction Bridging FinanceJoe Eden explains all about Auction Bridging Finance.
What is auction bridging finance?
The product we would use is a bridging loan with the best placed lender with a facility for auction purchases. There are a few lenders in this space.
With bridging loans, the lender often insists that you also have your own legal process, with your own solicitor doing the work to purchase the property. They’ll insist on using either your solicitor or their own to do their side of the job as well. It’s a little bit more detailed than a traditional residential purchase and sometimes it can be quite time consuming.
There are preferred lenders for auction finance because it has to be quick. These don’t have the same level of legals or no valuation process. So, very simply, auction bridging finance is a bridging loan placed with speedy lenders – because if you’ve gone to an auction, you could agree the price and have 28 days to complete. We need to make sure the lender choice is right to comfortably meet that deadline.
Who can use auction finance?
It’s for anyone buying a property that’s unmortgageable. If you’re buying a property that’s run down, inhabitable or it’s a flat with lease issues that lenders might not like, then auction bridging finance is a good solution.
A traditional auction will give you 28 days to complete on that purchase, so you need to move quickly. Unmortgageable properties and speed are the two reasons you would use bridging finance.
What are the key features of auction finance?
Speed is the top feature, for sure. If you agree to buy at auction today for £200,000, you usually have to put a 10% deposit down on the day – that’s £20,000 – and you have 28 days to complete (outside of a small notice period).
After that you could potentially lose your £20,000 deposit, which is why it’s so important to get the right finance. There isn’t a way where we can be relaxed about it. It’s just finding the quickest solution.
Speak To an Expert
Our typical process is that someone will get in contact with us or they might be referred to us by an agent. We’ll have an initial five minute chat to address any burning questions, then we’ll set up a Zoom call or a meeting and spend an hour or so going through your affordability and any advice that we can offer at that stage.
That’s entirely free. No matter what type of finance we do, whether it’s residential, Buy to Let, bridging finance, we don’t charge a penny until we physically apply for a product for you.
How do you apply for auction bridging finance?
You can speak to lenders direct, but there’s potentially a lot of money at stake if you’re buying at auction. A good broker can advise you and help you through the process, as a professional who does this day in, day out.
A broker often has access to more lenders than are available to the general public. We can also advise you on certain parts of the process that a lender wouldn’t, so it makes a lot of sense to work with a good broker for your bridging finance.
What fees are involved?
Typically you’ll have an arrangement fee of between one and two percent of the mortgage amount. Some lenders will charge an entry fee and exit fee – that might be 1% when you complete and 1% when you exit, through selling or refinancing the property.
The figures change all the time and it really depends on how much you’re borrowing. If it’s below £100,000 there might be fewer lenders in that space. If you’re borrowing a large amount, lenders may be more competitive to attract you as a customer.
Around 2% is probably the average arrangement fee. You’ll then potentially have a survey fee for a valuation on the property, plus the lender’s legal costs. The survey fee could be anything, depending where it is in the country, the purchase price and whether it’s commercial, residential or a multi-unit block. Legal fees are either a percentage of what you’re borrowing or a fixed cost.
So those are the three costs to consider when you’re looking at auction finance.
What else should we consider with auction bridging finance?
All I would say is try to avoid going to an auction and agreeing to the purchase before you’ve spoken to a finance provider. As an example, we had a client who completed on a portfolio of six properties last month, bought at auction.
He told us what they were doing in advance, so we had the lender do desktop surveys on all the properties before the auction – at no cost to the client. So when he visited the auction room the valuations were done, he knew his upper limit and had some finance terms already agreed. That way, it was literally just agreeing the price and having an underwriter review the overall case.
It’s well worth doing a little bit of legwork first, rather than risk your deposit by trying to get the finance sorted once you’ve already committed. It just means that you’ve got time to deal with any potential problems before you’re up against that ticking clock. Most auctions give you 28 days from the moment you agree to buy.