I’m considering buying a property at auction but I’m unsure of how to finance it. What are my options?
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Gary Lederberg, Director of Affirmative Finance explains how to go about financing your auction purchase without getting carried away by the exhilarating atmosphere
Buying a property at auction can be a great way to tackle the rising house prices and competitive housing market. However it can be easy to get carried away with the excitement and buzz of the atmosphere, so making sure you have everything in order before you place any bids is crucial.
Arranging your finances before you attend is key, as it will make sure you know how much you can spend and what your limits are. You will usually need a 10 per cent deposit with you to pay if you win, and then pay the remaining 90 per cent within a 28 day period. Make sure you know what you can afford and what funds you have access to ahead of the auction.
28 days might seem like a long time, but it is a small window to pay for the full price of a property. If you fail to meet the deadline you may ultimately lose your 10 per cent deposit and the property.
Whether you choose to apply for a mortgage prior to bidding or select another option to help you meet the deadline, have your financial arrangements organised. Below are a few of the options you can choose to help you buy at auction:
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Organise a Mortgage ‘Agreement In Principle’ (AIP) before you attend. This consists of a conditional “promise” from your lender, agreeing to give you a mortgage on the property if you win at auction. It is not however a guaranteed offer of funding.
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If you choose to go down this route, make sure you allow yourself the time to have a mortgage valuation survey done. This will be used by the lender to assess the property’s worth and whether or not they would be able to recover their loan in the event of a default.
It’s important not to confuse this survey with a structural survey. A structural survey should be sought before you bid depending on the age and condition of the property. You should also familiarise yourself with the property’s legal pack and before you bid seek further solicitor advice.
An alternative funding option is to arrange bridging finance to pay for the property within the 28-day period. Once you have met that deadline, you can then repay the bridging finance with a long term mortgage or alternatively sell the property for a profit (if you have purchased in the first instance to refurbish and / or sell on). Some bridging finance lenders will put in place pre-auction bidding facilities for both payment of the deposit on the auction day and for the balance of the payment of the purchase price.
It is important to remember that bridging finance is generally more expensive than long term mortgages with the maximum length of loan usually being up to 18 months. It is therefore important that you have, as mentioned, a settled exit strategy before taking out the bridging loan.
Seeking a loan from your bank is another option to consider. You may be able to receive a higher loan based on your own banking history or any customer loyalty schemes in place.
Whichever route you take when organising your finances, it must be ready for when you need to secure your property after winning at auction. When the hammer goes down at auction you are legally obliged to purchase and there is no going back. So remember, explore all your options and establish your finances before you set foot in the auction house to avoid any problems later on.
Gary Lederberg is a Director of Affirmative Finance, who offer flexible funding options to help you when you need it most. Affirmative Finance is authorised and regulated by the Financial Conduct Authority.