We've all seen it on TV, people picking up a bargain auction property at a knockdown price.
The trouble is, auction prices aren't guaranteed and although it's never the intention you could end up blowing your budget or taking advantage of an opportunity you hadn't planned for.
This means your finances have to be as flexible as possible to make sure you'll be able complete the deal. To get that right you'll need two things: to understand the auction process, and to arrange both primary and contingency finance
There are a few extra things you need take into account money-wise. For example you will be required to pay a deposit (usually 10%) on the day, and most cases you'll also need to pay the remaining balance within 28 days so fast access to finance is essential. If you're able to get a mortgage agreed in principle this is the safest option.
Arranging your auction property finance
As mentioned above, an in-principle mortgage is essential before you even go to auction. Base the mortgage around your budget, choosing a maximum 90% LTV (based on a 10% Auction House deposit).
A mortgage will almost always prove your cheapest option, so getting the right deal straight off the bat could save you time, money and stress later on.
Unfortunately if you do blow your budget or don't get a mortgage approved in time you may not be able to cover your auction purchase. The risk is that you could lose both the 10% deposit and the property; this is where auction bridging finance can help as your contingency measure.
Auction bridging loans
A bridging loan for an auction property can extend the money that you need at short notice, giving you time to renegotiate or apply for a mortgage (which should always be your main option).
This quick set-up means they are also an option if you don't have time to arrange an in-principle mortgage ahead of the auction, albeit an expensive one.
Property auction bridging finance is secured on an asset of your choice; however this is usually the property you're buying due to the amount borrowed. They last for a maximum of 2 years and charge monthly interest rates up to 1.6%.
If you choose to go ahead, bridge loan lenders will appraise your loan and its security before setting their auction finance interest rates. This means that property auction bridging loans charge valuation, arrangement and admin fees, on top of monthly interest.
In fact, these set up fees are every bit as important as the rates as an auction bridging loan is such a short term measure. Make sure you compare bridging loan auction rates and fees to get the cheapest deal.
Things to consider
As ever, be careful about overstretching yourself and remember that auction loan financing means taking out a second mortgage-sized debt. You'll need to satisfy your mortgage provider that you can afford the repayments on both debts.
The aim should be to complete your auction purchase using the bridging loan, and then pay it back immediately and in full upon receipt of your renegotiated mortgage.
Bear in mind that refinancing a bridging loan would be very expensive; while defaulting on its payment could see you lose the security. Make sure you've considered all of the financial implications and check the cost of your required loan on our auction bridge loans table before finalising your auction loan.
Finally, compare that cost to both your monthly and final repayment plan to make sure it's a suitable option for you.