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Auction Mortgages Explained: The Expert Guide to Fast Finance for Property Auctions
With more and more homes being sold at property auctions in the UK, understanding the process and how to get your mortgage in time to pay for one is an important part of the property market. Is there a specialist auction mortgage, and how do you get one? At Clifton Private Finance, we have the answers in our expert guide.
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What is an Auction Mortgage?
First, it’s important to note that despite us (and a lot of banks and lenders) using the term, there’s actually no such thing as an auction mortgage. If you get a mortgage to buy a property at auction, then it’s just a normal mortgage that’s been arranged very efficiently.
There are other products, such as bridging loan, that can also be tailored to facilitate an auction purchase, and often these are also called auction mortgages.
Let’s clear up the terminology and look into the differences between the products available to you.
Can I Get a Mortgage to Buy at Auction?
Yes. If your finances are in order and the process is properly managed, you can use a traditional mortgage to buy at auction. However, it can be difficult to arrange a mortgage quickly enough to meet strict auction deadlines on completing the purchase. You typically have 28 days to pay the full balance of the property value.
How Much Deposit Do I Need to Buy an Auction Property?
Auction properties require a 10% deposit once the bid has been won. Finance solutions may then be available from between 5% and 40% deposit, depending on circumstance.
The Auction Process
Auctions are an excellent way to snap up a property bargain. They represent a faster environment for property purchases, where properties are ‘sold-as-seen’, and there are no limitations in place regarding the house condition.
Many sellers have put their properties up for auction because they just want them sold as quick as possible, and aren’t looking for a long and drawn out sale.
They’re swapping maximising the sale price for the convenience of a quick sale - and you can take advantage of that, but you have to move quickly.
That’s the simple truth. The time taken between putting in a full application for a mortgage and the money being available is more than the four week window of an auction.
So, how do people buy at auction?
The Cash Buyer
The easiest way to buy an auction property is to have the full sum of cash in the bank ready to go. Cash buyers are those who have the funds available instantly (or at very short notice), allowing them to snap up opportunities without delay.
When you have the money ready to go, you are fulfilling the seller’s dream - getting them their money as quickly as possible.
There are many ways to be a cash buyer, one of which is to complete your sale on your previous home before looking at auction properties, perhaps renting or staying with family to cover the middle period.
However, many potential auction buyers do not have the funding available to make them a cash buyer, and look for financing solutions.
The Imitation Cash Buyer
To the seller, an imitation cash buyer looks and acts exactly like a cash buyer does, able to transfer funds without delay. However, in truth, this buyer is using debt finance in the background to give them that buying power.
One way of being an imitation cash buyer is through bridging finance, a short-term funding solution that quickly provides the cash you need.
Bridging finance is so common in auction transactions, that it is often called auction finance or an auction mortgage.
The Lucky Mortgager
Just because a standard mortgage takes longer than 28 days to put in place, doesn’t mean it can’t be done faster.
With the right preparation, efficient paperwork, and a smooth road, the stars can align to mean your mortgage lender can get everything done inside the 28-day window.
This can feel like a bit of a gamble though, because if anything does delay the process, you could find yourself needing to get the funds through other means with little headroom.
This is why it is best to work with an agile and efficient mortgage broker, like us at Clifton Private Finance. We can make sure a backup plan is put in place should the mortgage hit any bumps in the road, avoiding potential disaster.
Auction Mortgage vs. Bridging Finance
Whether to use a fast mortgage or short-term bridging finance is determined by analysing the situation. There are many factors that go into an auction purchase, each of which may lead to a different solution.
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Property Condition
Perhaps the greatest factor is the condition of the property you are looking to buy.
Many people consider auction properties because they have a plan to buy something in need of renovation, get it cheap, and then spend a little time and effort fixing it up.
The idea is that you end up with a lovely modern home for a fraction of the price - and it works.
Buying rundown properties and doing them up can work for:
- Home buyers looking to make the most of their budget.
- Landlords snapping up properties for profitable future rental yields.
- House flippers, planning to make profit through fixing up rundown homes and selling them on.
The biggest problem for those looking to buy property in a poor condition is that mortgage lenders cannot offer a mortgage - at least, not until the renovations are complete.
Regulations stipulate that a property must be in a liveable condition for a mortgage to be secured on it, which means it has to have a working kitchen and bathroom, and be generally habitable - for example, free from health-affecting damp, and other conditions.
A property lacking a roof, with a hole in the bathroom wall, and no working electricity may be cheap, but you’re going to need to be a cash buyer to get it - or imitate one.
In these instances, bridging finance is the perfect answer. Unlike a mortgage, bridging finance doesn’t assess the property based on condition, instead concentrating purely on its value.
In the right circumstances, you can even stretch the bridging finance to include the cost of renovation, giving you a full development budget for purchase and modernisation.
Costs
A smoothly placed mortgage is the most cost-effective solution for property purchase. Mortgages are a regulated, long-term loan product with significant government and lender backing.
They are offered by many banks and lenders in a competitive marketplace, which helps keep interest rates low, and fees minimal.
If it is possible to use a mortgage, it is usually the best decision based on finances alone.
In comparison, bridging finance (or auction finance) is a short-term solution designed to bridge the gap between your need for fast capital, and an eventual exit plan of repayment - usually by refinancing with a mortgage.
While bridging finance provides the power for rapid action, asking fewer questions and knocking back barriers, it does come with a cost. Interest rates are higher and arrangement fees can be as high as 2%.
Instead of being seen as a mortgage replacement, bridging finance is best considered as a stop-gap tool, providing the funds to buy within the 28 day auction window, and paid off through a mortgage once the dust has settled.
Financial Background
One of the other major differences between a traditional mortgage and bridging finance is the scrutiny on your current financial position.
This is also the reason for the longer application processing for a mortgage - long-term financing demands greater assessment of your affordability, evaluating income and outgoings to consider the weight of an ongoing monthly repayment commitment.
By contrast, the criteria for acceptance of bridging finance is based on other factors, with greater consideration given to the exit strategy and overall value of the secured property.
This alternative perspective makes bridging finance easier to obtain for those without a strong UK-based credit history, providing the time needed to build up affordability and credit score before moving over to a mortgage.
This can be extremely helpful for:
- Expats who may have difficulty proving income and lack a UK credit rating
- Applicants with bad credit
- Buyers moving for a new role that’s not yet started
Speak with a Clifton Private Finance advisor to discover how bridging finance can help you achieve your property buying aims.
Deposits and Loan-to-Value with an Auction Mortgage Solution
Buying from auction offers unparalleled opportunities to obtain a low-cost property, but the valuation will also play a large part on the size of funding that can be obtained.
At its most basic level, auction properties require a 10% deposit, with the remaining 90% paid within 28 days. This aligns with many traditional mortgages, where a 90% loan-to-value (LTV) is available for many residential buyers.
Bridging finance solutions tend to have a lower LTV amount, ranging from 60% to 80% depending on circumstances. This would mean a larger deposit of up to 40% may be required.
However, the flexibility of bridging finance offers alternative solutions, including using other properties as security, enabling an effective 100% LTV solution. Read more on bridging finance security and LTV in our comprehensive guide.
Landlords looking to bridging finance and mortgages for auction property should base expectations on a 75% LTV mortgage, with a 25% deposit for an interest-only BTL mortgage.
Auction Mortgage LTV
|
Auction Finance Solution |
Deposit |
LTV |
|
Cash purchase |
10% auctioneer’s requirement |
N/A (balance paid in cash) |
|
Residential mortgage |
5 to 20% |
80 to 95% |
|
Bridging finance with single security |
20 to 40% |
60 to 80% |
|
Bridging finance with additional security |
0% |
100% |
|
Buy-to-let mortgage |
25% |
75% |
Your CPF advisor will discuss the different options for you, working with a wide range of lenders to help you select the auction mortgage solution that fits your individual circumstances.
Auction Mortgage Solutions with Clifton Private Finance
At Clifton Private Finance, we work with the full marketplace of UK lenders to find the solution that best suits your needs.
Working holistically, we help you evaluate your financial position and the advantages and disadvantages of each financial option, resulting in a cost-effective solution that is both rapid enough to make an auction purchase within reach, while considering the long-term implications of interest rates, fees, and other factors.
With the right lenders, we can develop a package that lets you get the very best from an auction bargain.
Contact Clifton Private Finance today and let us open up the world of auction purchases and the wide range of property opportunities that once, only cash buyers could enjoy.
