March 7, 2024
Buying a property at auction can be a great way to get a bargain — if you have all your financial ducks in a row before you begin.
The key with auction properties is speed. In fact, that might even be the main reason auctions appeal to you.
While property auctions have a reputation for drawing cash buyers, it may be possible for you to get a mortgage on an auction property, or to use alternative financing methods such as a bridging loan.
While cash isn’t essential, it is essential to understand exactly how you are going to finance your purchase before you go to auction.
However you plan to fund your purchase, you will likely need to consult with a specialist mortgage broker before placing any bids at auction.
Introduction to Auction Property Financing
Before you can make a bid on an auction property, you should have a mortgage in place.
Because of the less straightforward nature of auction purchases, you will likely need to secure the services of a specialist mortgage broker.
Your ability to secure a mortgage on an auction property may be dependent on the usual factors, such as your income and outgoings, and the size of your deposit.
It will also likely be dependent on factors such as the condition of the auction property — making it even more important that you have a thorough property survey carried out before placing your bid.
Challenges and Opportunities
As with any route to property ownership, there are both challenges and benefits to consider in purchasing a property via auction with a mortgage.
Challenges of obtaining a mortgage for auction properties
In addition to the usual challenges associated with securing a mortgage from a lender, mortgages for auction properties come with their unique pitfalls.
Mortgage lenders may be more wary when it comes to lending against an auction property, due to the increased risk associated with purchasing a property at auction.
The fast nature of property auctions leaves less time for checks, surveys and consideration — and subsequently, properties listed at auction come with an increased risk of structural problems and other issues.
Additionally, whether the auction uses the traditional or modern method, it is either impossible or prohibitively costly to back out of an auction purchase, adding risk for both the buyer and the mortgage lender.
Benefits of buying an auction property with a mortgage
There are, however, some benefits that typically come with auction properties. Auction sales complete and exchange very quickly, so they can facilitate a fast move.
Because of the fast-paced nature of property auctions, it is also possible to get a bargain property — potentially saving you money by reducing the total amount you may need to borrow.
Eligibility Criteria and Financial Aspects
First, you will need to meet the same kind of eligibility criteria for a mortgage on an auction property as you would for any other mortgage, in terms of your deposit, income, and other affordability factors.
The key difference in mortgage eligibility criteria between auction properties and other property purchases is that lenders are unlikely to offer a mortgage on an auction property that is in bad structural condition or requires extensive work to make it liveable.
Down payments on auction property mortgages
There likely won’t be much difference between the percentage you pay as a down payment, or deposit, towards your mortgage for an auction property purchase, compared to other property purchases.
When you purchase a property at auction though, you will be required to pay a non-refundable deposit (usually 10%) immediately, with the remaining balance to be paid within 28 days (in the case of the traditional method of auction) or 40 days (for the modern method of auction).
Loan-to-value ratios on auction property mortgages
Typically, lenders will offer similar minimum loan-to-value ratios (LTVs) on properties purchased at auction as they do on other properties.
As auction properties typically have a lower sale price than comparable properties in standard sales, it may be possible for you to attain a higher LTV with the same monetary amount for your deposit.
Interest rates on auction property mortgages
Interest rates on auction property mortgages are typically comparable to those on other mortgages.
Role of Lenders in Auction Transactions
As auction purchases only have 28 or 40 days (depending on the method of auction) to finalise the exchange of contracts and pay the remaining balance, lenders have to be able to move quickly.
You will likely need to engage a specialist mortgage broker to secure a mortgage on an auction property — before bidding.
Lenders must then work swiftly with solicitors and estate agents like Simon Blyth to facilitate fast mortgage transactions for auction properties.
Navigating the Mortgage Application Process
Specialist mortgage brokers will be able to advise you on the details of your mortgage application for an auction property.
As a minimum, you should have all your details, documents and paperwork to hand before beginning the application process, and auction properties require you to move quickly.
Ensure that you have things such as proof of income, proof of deposit, and personal identifying documents, that all your paperwork is completed quickly and accurately, and that you are very responsive to communications from parties including your mortgage broker, solicitor, estate agent, and lender.
Considerations for Buyers
Before you even begin to pursue a mortgage on an auction property, there are some steps you should take to give yourself the best chance of making an informed decision.
- Do thorough research on the type of property auction you are interested in, and decide whether an auction property is the best route for you
- Consult with a specialist mortgage broker to understand your financing options and secure a mortgage in principle for an auction property
- Register with an auction house, view properties, and get surveys done to check the structural integrity of the property
- Understand — and stick to — your budget when bidding on auction properties.
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Purchasing a property at auction can be a great way to quickly bag a bargain and, contrary to popular belief, it is possible to get a mortgage on an auction property. You just need the right professional advice from an experienced mortgage broker — and to explore all your resources and options.