Auction Bridging Finance

What is auction bridging finance and how does this work?

Auction bridging finance is used to buy property at auction. If you’ve watched Homes Under the Hammer and other property shows, it always looks fun to go to an auction and nod your head to win a property.

But how do you actually buy it, unless you’ve got a bank account full of money? It’s very tricky to take a normal mortgage on this kind of property. They usually need a lot of work, so we have to use bridging finance.

Bridging finance is a short-term mortgage where lenders aren’t so fussy about what state the property is in. Auction bridging finance is a way to use someone else’s money to buy property at auction.

You need a deposit – we’ll come to that in a minute – and you pay interest on that money over a few months or up to a year. Again, we’ll probably talk about more, but you can usually borrow more for any work on the property.

You might buy a property for £200,000 that’s really run down. You want to spend another £50,000 or £60,000 doing it up and then sell it for £350,000, or rent it out. We use the bridge to fund that initial purchase, and potentially the work.

Once the work is done and it’s worth the final amount of money – the GDV, gross development value – we can either refinance, if you’re going to keep it, or sell it and pay off the bridging finance. It’s fast, flexible, short term property finance.

What are the eligibility criteria for auction bridging finance?

Literally anyone could get this kind of finance. The more experience you’ve got on projects like this, the more lenders you’d have a choice of.

The deposit is key – you probably need around 25% deposit plus more to cover fees. If you’ve got that, you’re keen to make it happen and you’ve got some good people around you, anyone can do it.

We’re not too fussed about your income, because it’s all about the exit strategy – how you are going to pay the bridging loan off at the end. This isn’t a mortgage that you’ve got to pay each month. With bridging finance the interest rolls up and you pay it off at the end. So lenders aren’t worried about whether you can afford the monthly payment.

What are the interest rates for auction bridging finance?

This will depend on a couple of factors – who you are and what experience you’ve got. That will influence which lenders we can go to. The fewer lenders we’ve got, the higher the rate is going to be.

Rates for bridging finance are not necessarily bespoke, but they’re not published like they are with standard mortgages. You can’t use a comparison site for bridging loans.

As brokers, we know which lenders to go to and what sort of rates they’re going to offer.
We approach a lender and they come back to us with an offer with the terms and rate. The more complex the situation and the faster you need it, the higher the rate is going to be.

We won’t necessarily get into quoting specific rates here because it changes all the time. As the Bank of England base rate potentially changes in the future, bridge rates will change as well. But being for property at auction doesn’t mean it will be a particularly high rate.

How is the loan amount decided for auction bridging finance?

It’s a percentage of the purchase price. We’ve got a few different schemes available. It could be a refurbishment type of scheme.

Generally, if you’re buying at auction, the property will need a refurb. It’s unlikely you’re going to buy a pristine house at auction.

We could generally get around 70% to 75% of the purchase price, plus potentially 100% of the cost of the works, as long as the property is worth enough at the end. We would talk you through this individually.

The loan is decided based on the purchase price and the work. The lender will value the work you’re going to do and what the property will be worth at the end, to make sure it all fits. We don’t always have time to do that in advance. Sometimes we just have to go in and bridge the purchase. We haven’t got long before the auction to do it, but we can sort the rest out later. You always have to put down a certain deposit based on the purchase price.

What is the repayment period for auction bridging finance?

Generally speaking, up to 12 months. The odd lender might go a bit longer, especially if it’s a heavy refurb project with planning, extending, knocking down and building back up.

We could go shorter if it’s an easy one and with just a new kitchen and bathroom. We could potentially do a nine month loan. There’s no hard and fast rule but generally 12 months is where most people pitch it.

Are there any additional fees associated with auction bridging finance?

All bridging loans come with fees. Generally speaking, you’re looking at a 2% arrangement fee and some legal fees because the lender will need a solicitor and you have to pay for it.

That cost will depend on the lender, the solicitor, the property and how complex the situation is. It could be £1,000 or a few thousand pounds.

We might need a valuation on the property. If it’s a basic residential property, that might be a few hundred pounds. If it’s a much more complex commercial property with planning or land and all sorts of potential for the future, it might be a few thousand pounds for a valuation.

If we need to go to a particular type of lender because it’s a complex situation, you might find an exit fee on the bridge when you pay it off. Certainly a lot of lenders will have a fee if you leave within the first couple of months.

They give you this money on the basis that you’re going to have it for a good few months. If you pay it off within the first three months, they’re going to struggle to get their initial costs back.

What happens if I need to extend the loan term for auction bridging finance?

You can, potentially, depending on the value of the property. Imagine you bought the property for £200,000 and put in the minimum deposit at the time. Then, 12 months on, you haven’t done anything to that property – it’s unlikely to have increased in value. We might struggle to rebridge that, because we’ve used up the equity that the lenders like to keep spare in case anything goes wrong.

If you bought a property and you’re most of the way through the refurb after 12 months, it’s probably worth more than you bought it for. So we could potentially go to another bridging lender to pay off the old bridge and go for another 12 months. That’ll give you plenty of time to get the rest of the work done and get the property sold or let.

Because things get more expensive all the time, it might be that you have run out of money or it’s taken a bit longer and cost more. As long as the property is now higher value, that new lender might lend us a little bit more than we owe the first lender, just like remortgaging your house. So you can get the extra money to finish off the project. As always, it depends on the situation, but it’s certainly possible.