Auction Finance

Speed is of the essence when it comes to auction finance so it makes sense to get as much of the preparation done beforehand as you can. This will include making sure you’ve got up to date financial information readily available including bank statements, payslips or accounts, and that you’ve made a plan for a viable exit strategy. Working through all of this with a broker will help you understand how much you might be able to borrow, and help to guide your choices when it comes to creating a property shortlist.

The first step should be to firm up an idea of exactly what you want to buy and for what purpose. The size and type of property will of course go a long way to determining not only your budget, but the type of auction you’ll need to attend. At this stage you may want to draw up a shortlist of suitable properties at upcoming auctions and think about viewings. You’ll also need to consider how you’ll pay the deposit. The auctioneer will require a 10% deposit, payable on the day as soon as you make the winning bid. Do you have the cash to cover this or will it need to form part of your auction loan?

The next step in the auction finance process should be to hand over to an auction loan broker your requirements and financial information about yourself, and for them to assess which lender will be right for you. They can then go directly to the lender and negotiate a deal on your behalf. At this stage you’ll be looking for a conditional acceptance. This provisional offer will likely have an element of flexibility within it to allow you to be responsive at auction. For example your lender may have agreed to fund the purchase of a four or five bedroom home, priced between £300,000 and £350,000. This helps you to stay focussed on your needs but to still have an element of flexibility for auction time.

At this stage you can also have surveys and valuations done on your shortlisted properties. Having as much information as possible is the best course of action when going into an auction scenario - you don’t want to spend out hundreds of thousands of pounds only to discover the property is overgrown with Japanese knotweed.

This makes it sound easy, but it’s not always that straightforward to win the property you want at auction. If you have got that far then congratulations, you’ve done it! As soon as the hammer falls you have entered into a legally binding contract and are committing yourself to paying for the property in full. In the first instance you have to pay a deposit of 10% of the sale price as a deposit on the same day. You will then usually have 28 days to pay the remainder of the balance in full and own the property. Do double check this payment window as they can sometimes vary and you may find you have more (or less) time than you first thought.

Once you’ve won the property you wanted and paid the deposit, it’s time to push through the finance and get the balance paid off. Timescales are tight at this stage, so it pays to use a broker who’s good at keeping things moving quickly and efficiently. A broker will also be able to help you decide how you want to repay the interest and what product features are most important to you.

This is the most important step in the whole process. Your auction loan will be secured on your property, so if you fail to repay it within the agreed timescales then you risk your property being repossessed and sold to repay the loan. Depending on what you bought the property for, you’ll most likely be able to repay the loan either once you’ve resold the property or when you’ve got other finance in place, usually in the form of a standard residential or buy-to-let mortgage.

Lending is all about risk and one way that auction finance lenders assess risk is to ask whether or not you’ve bought property at auction before or whether this is your first time. If you’re an experienced investor with a strong track record of buying at auction then your chances of getting the auction loan you need are likely to be higher than if you’re a first time novice.

This one is key as this is where your ability to repay the loan ultimately lies. Without a sound and clear plan in place for how you’re going to pay the money back, you’re unlikely to find a lender who wants to agree to a loan. An exit strategy doesn’t have to be complicated - often it’s simply that you plan to sell the property after some refurbishment or will be refinancing.

Unlike with regular mortgages, age isn’t normally a factor with auction finance, as you are only going to be holding the loan over a short period of time and not the 20-30 years you might expect with a mortgage. Most auction finance lenders don’t therefore enforce a maximum age limit on applicants.

Asking for a loan to fund a property purchase in the region of £100,000 is going to be a very different proposition to applying for a £1,000,000 loan. The higher the amount you’re looking to borrow, the more risk there is involved for the lender and so the more thorough and cautious they could be. Linked to the property value closely is the amount you’re looking to borrow as a proportion of value - the loan-the-value ratio or LTV.

Auction finance lenders will normally apply a maximum LTV limit on auction loans, to allow a buffer for any fall in value and associated costs should they have to repossess and sell the property to cover the loan in the event that you fail to repay it. The lower the LTV - i.e. the more money you are able to contribute yourself - the lower risk you’ll represent and so the higher your chances of having your loan accepted. That said, having a high LTV or even needing a 100% LTV auction loan needn’t be a deal breaker in itself if you have other assets you can use as security.

While much of the assessment of your ability to repay your loan will depend on your exit strategy and the property’s potential, lenders will still want to take a look at your credit record. Your credit history shows any recent incidents of poor credit management including late or missed payments, CCJs defaults and even repossessions or bankruptcy. Although having bad credit won’t automatically preclude you from being able to get any kind of auction finance, it may make it more difficult and could restrict your pool of potential lenders.

The important thing with any history of bad credit is to face problems head on. Don’t be fooled into thinking that by ignoring it you might be able to get away with not mentioning it - everything on your credit reports will be visible to lenders when they run their credit checks and if you’ve not been honest about issues then you’re more likely to have your application declined.

The best thing to do is to get copies of your credit report before you start and share these with your broker. THey’ll be able to assess the potential impact on your application and, if they think it's necessary, change the lenders they approach to prioritise those with a more inclusive attitude to bad credit.

This is another factor that could be an indication of risk for lenders, and is something that could impact your exit strategy and your ability to either resell or refinance further down the line. For example, many mortgage lenders are cautious about offering mortgages on properties of non-standard construction such as timber or steel framed homes, thatched properties or high rise flats. If you’re buying a property like this at auction planning in the medium term to get a traditional mortgage in place, auction finance lenders might be sceptical about how straightforward this will be and therefore how easy it will be for you to pay off your auction loan.

The best thing to do in this instance is to talk to your lender before you attend the auction about the property types they are comfortable with and how property type might impact your conditional loan offer. It’s always worth checking this - you don’t want to get a provisional offer on a loan for a three bedroom house and find, after you’ve bid on a thatched cottage, that this only applies to standard construction homes.

Another factor that can influence your chances of getting auction finance is what you plan to use the property for. One obvious distinction is whether you are buying a home to live in yourself, or whether you’re buying it as an investment to rent out. Many lenders will go as far as to have separate products - residential auction loans for home purchases and buy-to-let auction loans for investments. Make sure you’re clear on usage from the outset so you don’t find yourself stuck with a product that doesn’t suit your needs.