Auction Loans- Using Bridging Finance To Buy At Auction
Buying at auction is a completely different experience compared to purchasing a property through a more traditional method. Going through an agent is a lengthy process involving several viewings and negotiations, followed by an approval timeframe for financing before the contract can finally be signed.
Buying at auction starts with the catalogue. After reading the publication there is time to view, study the legal pack and possibly complete a house survey. Auction property is then sold immediately on the sale day. When the hammer goes down, the buyer is fully committed to the purchase and has to usually pay around a 10% deposit of the purchase price immediately, with the balance due within 28 days. The deposit amount and timeframe for payment may vary from these.
As it can be difficult to procure a mortgage in such a timeframe, particularly if the property is uninhabitable, many investors turn to short-term auction finance options to enable them to buy quickly.
Short-term auction finance options
When purchasing auction property, investors initially may seek short-term finance as traditional mortgages can take time to be approved. Sometimes it may not be possible to get a definitive answer in time for the sale. However, it may be possible to get a mortgage in principle with your chosen lender, which can provide enough time to secure the funds before the balance is due. Be aware that this may not be assured, so investors need to keep their options open and consider alternative methods of funding. The most common alternative is a bridging loan.
Bridging Loans for Auction Purchases
Bridging loans for auction purchases are short term funding options that help bridge the gap while long term funding is secured. Applications are often approved in just a few days. The loan period is generally 6-12 months, although it can be repaid at any time within the set term with no early repayment fees at Novellus (save for the notice period to repay).
Bridging loans vs. auction mortgages
When seeking a loan for auction property investors can consider either a bridging loan or an auction mortgage as methods to finance it.
A bridging loan is a short-term funding option, whereas a mortgage is a form of long-term finance. Securing a mortgage takes several months and it may not be possible to have the money in the bank ready for the short time frame of an auction purchase. Catalogues are published 2-4 weeks prior to the sale, with the full amount due to be paid on any successful bids 28 days after the auction. This allows 6-8 weeks to make sure funding is in place.
Auction Loans- Using Bridging Finance
Lenders will agree to a mortgage in principle prior to auction but it still relies on the paperwork being completed before the 28-day deadline.
Bridging loans generally take 1-2 weeks to process from the application being made, ensuring that finance is available quickly. This means funds would be available to make the 28-day deadline on an auction purchase.
Advantages of bridging loans used for auction
The main advantage of a bridging loan is the quick application process, which ensures the funding necessary to buy a property at auction is available within the required timeframe. However, there are several other advantages, which include the following:
- A bridging loan is based on the borrower’s ability to pay the loan back within the agreed timescale, rather than solely based on income or credit history, although these factors may also be considered during the application
- It’s possible to pre-arrange a bridging loan prior to the auction. If the bidder is successful and purchases the desired property, the bridging loan can then be fully approved.
- Bridging loans can be awarded for properties that a high street lender would never consider, including uninhabitable properties. The loan gives the purchaser time to carry out the renovations and either secure long-term funding when habitable or re-sell.
- Borrowing at 75% LTV is common, although if another property is used as additional security it may be possible to get further borrowings.
- Bridging loans for purchases at auction can also be used for land or commercial property purchases, as well as domestic properties.
- If you obtain a Bridging Loan with Novellus there are no early repayment fees.
Aspects to consider before applying for a bridging loan to fund an Auction purchase.
There are a few things to consider carefully before making the decision to take out a bridging loan for an auction purchase:
- The borrower must have a high-value asset to act as security against the loan. This can be the property being purchased or existing property. If the borrower defaults on the loan, this asset can be called in to pay off the loan.
- There must be an exit strategy in place to pay off the loan. Examples include selling the property or securing long-term funding.
Novellus offer bridging and development finance, including bridging loans for auction. This is aimed at investors looking to buy commercial property, land (with or without planning) and refurbishment projects. Rates start at 0.54% per calendar month. Novellus do not offer fixed products and each case is underwritten on its individual merits.
Auction Loans- Using Bridging Finance To Buy At Auction
The quick turnaround required for auction purchases means it can be challenging to secure funding to purchase an auction property within the timescales. The auction loan from Novellus fills this gap with its quick completion time for loans, from application to approval. A swift decision is guaranteed on all applications, ensuring the funds are in the bank immediately after the approval and legal process has completed.
Borrowers deal directly with a principal which ensures the application process is a swift one. Anyone in need of fast finance can apply as every application is considered individually.
Find out more
To help discover the approximate costs involved with bridging finance use the online bridging loan calculator for guidance.
Novellus offers a stress-free application process.. The best way to find out if you qualify is to simply call today on 0203 397 4871 or fill out our form below.