Auction rooms across the UK are often filled with property investors looking to buy property, ensuring that hundreds of residential and commercial properties are sold under the hammer every week.
The word ‘auction’ is still synonymous with ‘bargain’ and for good reason, as there are plenty of ‘below market value’ properties available, while buying property at auction also means no property chain, with buyers and sellers entering into an immediate and legally binding contract as soon as the gavel falls.
Here are a few pointers on how to finance a property purchase at auction:
Once you have read through the auction catalogue, found the house or flat that you want to buy and have conducted all necessary due diligence on the property, it is time to get your finances in order – something that should be done before the day of the auction.
You must have a 10% deposit with you on auction day, and you must come up with the remaining 90% within 21 to 28 days.
If you are not paying in cash, you will need to arrange for a home loan to buy the property.
If you do need a mortgage, it is highly advisable that you discuss all of the financial implications with a bank or building society, and have an agreement in principle from your lender before buying a home at auction.But the biggest concern with this option is that you will be taking a greater risk in terms of timing.
Lenders, especially inlight of the recent introduction of the Mortgage Market Review, which imposes stricter rules on mortgage lending, with borrowers facing a series of tougher questions about their spending habits, are not always going to be able to provide the necessary finance required within the relatively short 21-28 days completion period. This could result in you losing your deposit if you cannot arrange another loan in time.
The quick turnaround of exchange and completion at auction means that a growing number of purchasers are turning to short-term finance lenders for an instant bridging loan, at a significantly higher borrowing rate, before eventually obtaining a more attractive deal from a conventional mortgage lender.
While using a short term finance lender is a more costly way to buy property, it does provide buyers with confidence to purchase property at auction knowing that they will have the money in place to complete a transaction. What’s more, it also buys the purchaser more time to source the best mortgage deals from conventional mortgage lenders, at a more attractive borrowing rate.
Whether applying for a traditional mortgage or approaching a short term lender for a bridging loan, there are various elements that you need to have prepared in advance, including set documents, such as a passport or driving licence, proof of residence and a declaration of income. Ask the lender to liaise directly with your solicitors and provide the loan in time for the completion date.
Set a maximum bid
Finally, if you overbid for the property on the day of auction, you could be left with a gap between the lender’s valuation of the property and the price you pay on the auction day, which would mean that you would need to cover the shortfall from your own pocket.
No matter how much you want the property, always stick to your budget!