Auction Bridging Finance
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Auction Bridging Finance
We understand that buying property at auction comes with tight deadlines, and bridging finance can be the perfect solution. Rohit Kohli explains what auction bridging finance is, the eligibility criteria, the associated costs, the risks involved, and how our expertise can help you succeed.
What is auction bridging finance? How does auction bridging finance work?
It is basically short-term funding used to help you buy property at auction. You typically have tight deadlines of 28 to 56 days to complete the purchase, and bridging finance helps to get that over the line quickly. It is usually secured against the property being purchased, but it can be secured against other property if you have other property available. This allows you to complete quickly.
You then exit the finance either by sale of the property (once you have done work to add value onto it) or by refinancing onto a standard mortgage or a Buy to Let mortgage if you are keeping the property to rent out.
What are the eligibility criteria for auction bridging finance?
The most important part is having a clear exit strategy for how you plan to pay the bridge back. That is the first thing that we and lenders will look at. Lenders will also consider:
- Property type and condition: This will affect what kind of finance you can get.
- Experience in the industry: This can be helpful, but it is not always essential. There are options for people who have not done this before, but, in those cases, more focus will come onto your actual plan and how you are going to exit.
- Credit history: This plays a part and tends to be more flexible than the mainstream route, but it is an important consideration for ensuring you can refinance as part of your exit strategy.
- Sufficient equity or deposit: You need this, and potentially some funds available to do any work.
If we had to say what the most important parts are, it would be the exit strategy, the actual property itself, and the marketability of that property afterwards.
What are the interest rates for auction bridging finance?
It is difficult to quote a specific number because the market changes so quickly, and any number quoted today may not be relevant later. Rates can vary. They are usually more expensive than normal term loans because you are paying for speed and risk when going down this route. The rates you get are normally quoted on a monthly basis and charged monthly.
The rate can depend on a number of things. A lot of bridging lenders will look at how attractive the proposition is, factoring in:
- The risk factors.
- The plan and how solid the exit strategy is.
- The Loan to Value (how much you are looking to borrow against the potential value of the property now and in the future).
- The type of property.
- Your profile as a borrower (your experience and if you have a good plan).
How is the loan amount decided for auction bridging finance?
It depends on the deal and the project.
- Small renovation projects: For a property that is not habitable and needs work (like a new kitchen or bathroom), lenders may be willing to go up to 60% or 75% Loan to Value.
- Development projects: If you want to knock something down and rebuild, and you need funds for that kind of activity, we can look at potential lending against future value.
How much you can borrow will depend on how strong your proposal is and what you are intending to do. You may be able to borrow a bit more than what the property is worth today, but you will get that money in stages as you are doing the work and as it is progressing.
What is the repayment period for auction bridging finance?
Sometimes it can be as quick as a month or two, but normally three months is the shortest term. Typically, we see terms of between three and 12 months. However, you can finance for longer – up to 18 or 24 months for some larger projects that require more work.
Are there any additional fees associated with auction bridging finance?
Yes, definitely. Since it is a commercial, professional product, the fees tend to be higher than standard mortgages because lenders are taking more risk and more work is required to get these deals secured. You will usually see:
- Arrangement fees: Typically between 1% and 2%.
- Valuation fees: Valuations for these types of properties are done with a greater level of detail than standard mortgage valuations; they will be more structural.
- Legal fees: You will normally need to cover both your own and the lender’s legal fees.
- Broker fee: A broker fee is payable.
- Exit fee: Sometimes you may have to pay an exit fee, particularly if you are exiting much earlier than planned, but a lot of lenders are taking that away now.
The important thing about fees is that some of them can be added onto the loan and rolled into the loan itself, rather than paying them upfront. You need to weigh up whether that is an effective option, as it does mean you are paying interest on those fees, which will increase your overall cost.
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What happens if I need to extend the loan term for auction bridging finance?
It usually involves paying some kind of penalty, because the expectation is that you are going to exit on time. These penalties will be in the contract. If you are not able to exit, there could be extension fees, and you will have to continue paying interest. It might be that the interest rate goes to a higher level, which will be in the contract. You might need to take updated valuations, and you may even have to pay additional fees to renew or extend the loan. Extensions are not always guaranteed.
The important thing is that you need to talk to your lender early if you think this is going to happen. We always suggest planning for delays upfront and thinking: contingency, contingency, contingency. Think about how long it is going to take and add contingency into your plans.
What are the risks involved in auction bridging finance?
You have got to remember this is short-term lending, so it is riskier than longer term finance strategies. Key things that can happen that can knock your plans include:
- The exit not happening on time: For example, if you plan to sell the property and the market takes a turn for the worse.
- The property value does not stack up: This is for refinance once the work is completed, for whatever reason.
- Unexpected delays: For example, you discover something unexpected when doing work that costs you funds and delays things.
- General market changes and changes to lending criteria: This could have a knock-on effect on your exit strategy.
The best thing to do when thinking about a bridge is to think about your exit and your contingency plans, and have enough headroom to allow for additional cost and give yourself enough time to properly execute your exit.
Can auction bridging finance be used for non-residential properties?
Absolutely, yes. There is finance available for all types of properties: commercial, semi-commercial, mixed use, and even developing some sites with certain lenders. However, rates will be different, and what you may be able to borrow may be different from a residential property because there are different types of risks involved. There are fewer lenders that do it compared to residential, but there are still plenty of choices out there.
Is auction bridging finance available for properties outside the UK?
It is UK-based property only in the main. There are some very niche lenders that will look at financing overseas assets. It is a very specialist area and is often only available to very high net worth cases, given the risk that is involved. It can be very expensive and very complex to sort out. The answer is it can be available, but it is very difficult and complex.
How long does it typically take to get approval for auction bridging finance?
It is fast finance, relatively speaking, but do not wait until the day of the auction. You should be talking to a broker as soon as you have an idea to go down this road to talk about your proposals and check whether you are likely to qualify for the funding.
If you come to us, we will do some initial due diligence checks, speak to some lenders, and get you an initial Decision in Principle within 24 to 48 hours. Full approval can take anywhere between seven and 14 days, depending on how quickly valuations and things like that can happen. Completion can be as fast as within seven days of the offer going out in some cases, but usually, expect up to 14 to 21 days.
Overall, you can probably get a bridge sorted out and complete the purchase within four to six weeks, rather than three to five months for a standard purchase. To avoid delays, be prepared, look at the documentation earlier on, and use a conveyancer or a solicitor that specialises in bridging finance.
Can I use auction bridging finance if I already have a mortgage on another property?
Yes, that is not a problem at all. It comes down to how much you have already borrowed and what the proposition in front of you looks like. It will just be assessed as any normal lending will be assessed, to check if the risk is too great to lend to you with the other debts that you have in the background. The main focus is on overexposure, your position in terms of equity, and your exit strength. Having a mortgage already on a property does not necessarily stop you from moving forward with this kind of funding.
Are there any restrictions on how the auction bridging finance funds can be used?
The funds need to be used towards what you are doing with the property as part of your plans. You need to use it towards either the purchase price, the refurbishment activity, or paying some of the other associated costs as part of your project. It is restricted to what you actually intend to do with that finance rather than using it for anything else. You are not expected to hold onto it long-term. If it is really heavy development that is needed, then that probably needs to go down a more specialist development finance route than a bridging route.
What happens if I fail to repay the loan for auction bridging finance on time?
Unfortunately, people do have issues and are not able to repay the full loan when expected. If you think that is going to happen, the first thing you should do is contact the lender as early as possible, because they will want to work with you to resolve this. If you leave it too late, that is going to cause you more issues.
You could end up having to pay lots of penalties, which get added onto the loan. You could end up paying default interest (much higher levels of interest) on the loan once it is paid off. Worst case, lenders could enforce the payback of the loan, which could mean repossession of the property or other assets that the bridging finance is secured on. Early intervention is the best remedy for it.
How can a broker help? Is there anything else to add?
A broker can provide invaluable expertise in this complex area, which has a lot of risk attached to it. An expert can help you go through what you are planning, how you are planning on doing it, what your options are, and what it might mean.
So many people try to do this on their own and end up in a real mess because they cannot get the finance in time, they lose their deposit at the auction, and then have to pay penalties as well. Given the deadlines that are involved, find a broker that can work with you, be proactive with that broker, and partner with them to make this work for you.
Auction bridging finance is a strategic tool. It is not something you can just do; you need to plan for it and be ready for what is involved. If you use it properly, it can create opportunities for you, but if you do not plan for it, it can get very expensive, very fast.
Summary
Auction bridging finance is a crucial, short-term financial tool for purchasing property at auction, where quick completion is essential. Success hinges on a robust plan, particularly a clear exit strategy for how the loan will be repaid, either through selling the property or refinancing. While the finance is fast and flexible, allowing for lending on various property types (including non-residential) and even against future value for development, it involves higher costs due to the speed and risk. It is vital to be prepared, plan for all contingencies, and work with a broker and solicitor to navigate the complexities, secure the funding, and manage the associated risks effectively.
Key Points:
- Purpose: Auction bridging finance is short-term funding for buying property at auction with tight completion deadlines (typically 28–56 days).
- Exit Strategy is Key: The most critical eligibility factor is having a clear and solid plan to repay the loan (exit strategy) through either the sale of the property or refinancing.
- Cost vs. Speed: Rates are typically higher than normal term loans because you are paying for speed and risk. Rates are quoted and charged monthly.
- Loan Amount: The amount is project-dependent (renovation, development) and can involve lending against future property value based on the strength of your proposal.
- Loan Term: Typical terms are between 3 and 12 months, extendable up to 24 months for larger projects.
- Fees: Fees are higher than standard mortgages and include arrangement fees (1–2%), detailed valuation fees, legal fees (for both you and the lender), and a broker fee. Some fees can be rolled into the loan, but this increases the overall cost.
- Preparation: Talk to a broker as soon as possible. Approval in principle can be quick (24–48 hours), but full completion of the purchase takes around four to six weeks in total.
- Non-Repayment: If you think you will be unable to repay, contact the lender immediately to work out a solution and avoid penalties, default interest, or repossession.
- Restrictions: Funds must be used directly for the purchase, refurbishment, or associated costs of the property project.
- Broker Value: Having an expert broker is invaluable for navigating the complexity and risks involved, ensuring your plan is solid, and securing the finance on time.
YOUR HOME IS AT RISK IF YOU FAIL TO KEEP UP PAYMENTS ON YOUR MORTGAGE OR ANY OTHER LOANS SECURED AGAINST IT.
BUY TO LET MORTGAGES AND COMMERCIAL LENDING ARE NOT USUALLY REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.