property auction finance

How does property auction finance work?

21 / 12 / 21

If you’re in the market for purchasing a building for a bargain, a property auction is one of the best places to go. However, purchasing a property via an auction isn’t as straightforward as it initially appears, so let’s run through how property auction finance loans work.

What is an auction finance loan?

Before we delve into how property auction finance works, you may be wondering what is auction finance.

Auction finance is just a sub-category of bridging loans, though one that comes with even more pressure given that properties won at auction usually need to see the buyer complete the purchase within 28 days, depending on the auction house.

Many people buying at auction opt for this type of short term finance solution compared to a Buy-to-Let (BTL) mortgage, because with BTL mortgages there’s a chance you won’t be accepted, or the money can’t be arranged within the deadline.

This makes bridging loans an ideal short term finance solution for successful bidders in the UK who don’t have direct access to private funding, or who aren’t cash buyers.

How does auction finance work?

If you’re the winning bidder when the gavel hits, you’ll need to pay a minimum of 10% as a deposit for the home, as well as auction specific fees, such as admin fees. After this, you’ll have 28 days to pay the remaining 90% balance.

Many bridging finance providers will lend in the region of 70-80% of the purchase price which does leave the buyer needing to put in further funds. Bidders typically purchase a property at auction that needs some repairs or modernisation and often attribute their liquid cash towards these costs. This means that getting the maximum amount towards the purchase price is of the upmost importance.

With Velocity Bridging, we offer marketing-leading auction finance loans of up to 90% with no need for additional security. With our dynamic private funding and swift processes, we can ensure a 2-week turnaround, giving you room to breathe!

Our quick and easy 90% auction finance solutions are directly available to customers purchasing a property that is worth over £100,000 and up to £500,000 through auction.

It’s important to remember that if you should be unable to complete the purchase, you may lose the property along with your initial 10% deposit and any other costs you may have incurred, such as surveying and other fees.

What to remember when applying for an auction loan

When applying for auction finance, it’s important to remember that having a well-devised and clear exit strategy is key to success when applying for finance.

An exit strategy is how you plan on repaying the loan at the end of the term. Common exit strategies include remortgaging or selling the asset, and this can be evidenced using its saleability or an agreement in principle. 

It’s expected that you exit between 1 and 12 months of taking out the loan. 

Interest rates will also be applied to your overall loan amount and must be considered when strategising your exit plan. Interest rates on auction finance loans can be charged in 3 different ways:

  • Retained interest means the lender calculates how much you’ll owe at the beginning of the term and will add the monthly interest payments to the loan. This will mean you’re “borrowing” the interest for a set period of time and you’ll then pay everything back at the end.
  • Monthly interest simply means you pay interest monthly and when you come to the end of term, you’ll then pay the debt in full.
  • Rolled up interest means that interest is totalled and added to the loan. At the end of the loan term, you will pay the total interest as well as the loan amount.

How to apply for an auction loan

So, you’ve won the property you’ve been bidding on, paid the 10% deposit and now you need to apply for your auction loan.

Velocity Bridging application process is quick and easy and you can go from enquiring to completion in 6 steps!

  1. Sending in your application. Simply head to our contact page and fill in the form with your details. Be sure to be as accurate as possible when filling in the application because this will help our decision-makers.
  2. We’ll issue your offer. Once we’ve received your application, we aim to send a DIP and other documents back to you within 2 hours.
  3. Once received, you then have the choice to accept or reject the offer. When you accept our offer, simply return the documents and the countdown begins!
  4. Velocity Bridging then gets started on the legal behind-the-scenes paperwork and we’ll instruct our solicitors to begin. We may also instruct a formal valuation if we think it’s necessary.
  5. We then do our typical credit and media checks, carry out the due diligence and our Lending Director will inspect the property.
  6. Finally, the legal and underwriting processes come to a close and the deal completes.

It’s that simple! If you want more information on our auction finance solution or wish to apply, head to our contact page.

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