Auction Bridging Loan

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Author: Elliott Culley - Director & Mortgage Adviser of Switch Mortgage Finance

Can you get a bridging loan for an auction property?

Yes, if you are purchasing a property at auction it is likely you will need to fund this purchase through a lender that offers auction bridging loans. Due to the short timescales you need to finalise the purchase and because properties bought at auction are usually in poorer condition, you may find a traditional mortgage is not suitable for the purchase. This is where a bridging lender experienced in auction purchases can assist.

What is an auction bridging loan?

An auction bridging loan is a short-term financing option designed to help you obtain finance quickly to help fund a purchase of a property. These loans are typically secured against property for usually around 12 months and are an option some use to help purchase properties either quickly or not in a liveable condition. 

What is an auction bridging loan used for?

An auction bridging loan is used to purchase a property quickly which has been bought an auction. Auction purchases need to be completed in short amount of time and therefore you need a bridging provider that can finance your purchase quickly.

How do auction bridging loans work?

Auction bridging loans essentially work like any other type of bridging loan. There is a process from application to completion, the important part being repayment, as borrowers must have a sufficient exit strategy in place in order to repay the lender.

  • Application – The borrower applies for an auction bridging loan with a lender. The lender will assess the borrower’s financial circumstances and the value of the purchased property to determine whether they are eligible for the loan.
  • Valuation – A valuation is carried out; this will determine the maximum loan amount that the lender is willing to offer, alongside criteria set by the lender.
  • Offer – If the borrower is approved for the loan, the lender will make an offer which will outline the loan amount, interest rate, fees, and repayment terms. If the borrower accepts the offer, they will need to provide any necessary documentation and agree to the terms and conditions of the loan.
  • Completion – Once the loan has been approved, the borrower can use the funds to purchase the property at auction. Typically, funds can be delivered very quickly – within a week, depending on the complexity of the case.

How much deposit do you need for an auction bridging loan?

Most bridging providers will need you to put down 25% deposit of the purchase price. As with a traditional mortgage the higher deposit you put down the lower the interest will be.
If you are purchasing a property below market value, then you may be able to decrease the percentage of deposit you need to provide. Potentially up to 90-100% of the purchase price.

Below market value bridging loan

The vast majority of bridging lenders are only prepared to provide finance for properties based on the purchase price. Raising larger deposits can be a problem to overcome when attempting to acquire properties at auction which are below the market value.

There are some bridging lenders that will look at the open market value, so it is possible to obtain loans up to 100% of the purchase price. It is dependent on the surveyors valuation of the property and provided this comes in higher than your purchase price it is possible to obtain a mortgage with a smaller deposit than on a traditional bridging loan. 

Speak to an Expert!

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Contact us today for expert advice and guidance on your unique mortgage and property needs. We will work with you on a one-on-one to basis to help you find the right solution for your needs.  

With our experience you can rest assured that you are in good hands when it comes to securing the financing you need for your property.

Purchasing a buy to let property at auction

You can purchase buy let properties at auction. The common name for this is a bridge to let. Financing a property through a bridge to let loan can allow you the flexibility to purchase a property quickly at auction.

If you are buying your first buy to let property, or you are purchasing a HMO or multi-unit property, then some lenders may not lend to you because you are not an experienced landlord. You will need to make sure you find a bridging lender that fits your personal circumstances.

What is the minimum term for a bridging loan?

The minimum term for a bridging loan is usually 1 month, but it can vary depending on the lender’s terms. Most lenders will provide you with a longer term, just in case you need the funds for longer than you had initially planned, but you can pay back the loan sooner if you wish to. The average is between 6-12 months.

How fast can you get an auction bridging loan?

You need to obtain the finance quickly so an experienced auction finance lender will be able to fit with the normal timescales required of an auction to provide the finance in time for completion. Some lenders can provide it quicker than others, so you want to approach the right lender. You will also need to be able to provide the documents quickly. 

What Is a Buy to Let Mortgage? Switch Mortgage Finance

Do you need a valuation for an auction property?

Yes, lenders usually require a property valuation to assess the property’s value and determine the loan size they can provide. For auction finance its more likely a lender will try to carry out a desktop valuation so that the process is not delayed. However on some occasions they may need a full valuation to occur.

Is auction finance expensive?

Auction bridging loans generally have higher interest rates and fees compared to traditional mortgages. This is due to the high risk of the property for the lender, the quick access to finance they can provide and the flexibility they can offer.

Interest payments are accumulated on a monthly basis and therefore the longer you have a bridging loan, the more interest you will pay, so you will want to ensure you plan your exit strategy well and ideally have no delays which could end up meaning you pay back more as a result.

Do I need proof of income for a bridging loan?

Most bridging providers will assess your income as part of the assessment of the loan. If you are paying bank the bridging loan on a monthly basis then you will need to prove you can make the repayments. If you are rolling the interest up, bridging lenders may still need to assess your income, depending on what your exit strategy is.
There are some lenders that do not assess your income, these lenders usually are slightly higher in the rate they will offer you.

Do bridging loans check credit score?

Yes most lenders will carry out a credit check on you. This is because the lenders want to assess the likelihood you will be able to repay the bridging finance. There are some lenders that do no credit score, however the interest rate and cost will be higher.

Do you pay monthly payments on an auction bridging loan?

Auction bridging loans are usually offered on an interest only basis with the capital repaid when the loan term ends. You can choose to make payments monthly, or have the option either to roll up your interest or choose retained interest.

Serviced Interest

Very similar to an interest only mortgage you will need to make monthly payments to the bridging loan. In this scenario you can sometimes borrow more if you can afford the monthly payments.

Rolled up Interest

Rolled up interest on a bridging loan is applied to the balance owing each month. If you take the loan over 12 months, the rolled up interest is calculated at the outset on a monthly basis. If you repay early, you normally get back the interest on the portion of the original loan term you did not use.

  • You take out a gross bridging loan to the value of £100,000
  • Interest on the loan is set at a rate of 1% a month
  • Therefore, over a 12 month loan period, the lender would deduct £12,682.47 from the loan and you would receive £87,318
  • If you settled the loan just before 6 months, you will get a rebate on the remaining interest.

You can see that the compounding nature of the interest means that the total interest paid is slightly higher.

Retained Interest

Retained interest is where you borrow more than you actually need, with the extra covering the interest on the total loan for the full loan term. Again, if you repay the loan early, you may get a refund for the interest on the period of the full loan term you did not use.’

  • You take out a gross bridging loan to the value of £100,000
  • Interest on the loan is set at a rate of 1% a month
  • Therefore, over a 12 month loan period, the lender would deduct £12,000 from the loan and you would receive £88,000 (12% of £100,000 = £12,000).
  • So, in 12 months time, you would be expected to pay back the full £100,000
  • If you settled the loan just before 6 months, you will get a rebate on the remaining interest.

How are bridging loans paid back?

The most common way to repay a bridging loan is via refinance to a traditional mortgage once the property is in a mortgageable condition. Sometimes the property is sold after completing renovations and the bridge is paid back through the proceeds of the sale.

Why use a bridging expert?

When you require bridging finance, you’ll want access to the best products on the market. Not only that you’ll want the right bridging provider for the job.That is where our expertise can come in to support the process.