Auction finance

What is auction finance?

Auction finance is a short-term property loan designed to secure property purchases at auction. Like bridging finance, auction finance is intended to be released quickly, meaning you can meet auction house time requirements to complete your purchase.

How does auction finance work?

Auction finance is provided by bridging lenders, as these institutions are equipped to process applications and release funds within four to six weeks. Terms for auction finance are anywhere between one and 18 months, although some lenders will offer 36 months for more extensive development projects.

When should I apply for auction finance?

It’s best to approach a lender before the auction for an overview decision based purely on numbers: the deposit amount, current property value, expected property value after refurbishment, your income, etc.

These are called ‘indicative terms’ and are subject to a full credit check by the lender once you’ve won the bid at auction. Our team can help find the right auction lender for you.

Will I need to make monthly repayments?

As a short-term loan, interest is charged monthly. Generally, you won’t have to make monthly repayments as it’s accepted that the property won’t generate an income if you’re doing any refurbishment work. 

Some lenders may allow you to repay interest during the bridge term, freeing up more funds for the initial purchase. However, these loans are uncommon due to the financial stress of repayments during refurbishment. Lenders may consider experienced property developers or high-net-worth individuals on a case-by-case basis. Our expert broker team can assist in presenting your case to a potential lender.

What do you need for an auction finance application?

To apply for auction finance, your lender will generally require:

• Address and details of the property you’re purchasing/have purchased

• Your details

• Details of your planned refurbishment or development work

• A copy of the auction sales particulars

• Details of your intended exit strategy

Your exit strategy

When you apply for a bridging loan, the lender will want to know your “exit” strategy at the point of application. So, it’s best to decide your exit plan ahead of time.

If you intend to sell the property for profit, you must convince your lender that your refurbishment work will add value to the property to ensure it sells for enough to repay the auction loan.

If you plan to keep the property as a buy to let investment, you will need a Decision in Principle (DIP) for a buy to let mortgage before applying for your bridging loan. The DIP will be based on the predicted end value of the property after works have been carried out. Our team can help secure you a DIP and your auction finance.

How much does auction finance cost?

Interest rates for auction finance range between 0.43-0.85% per month.

The type of property or land you purchase will impact the rates you can access. Typically, you’ll get a lower interest rate for residential properties and higher interest rates for commercial property or land.

Like any property finance, the more you invest in the property upfront through your deposit, the better the interest rates you can access.

How much can I borrow with auction finance?

It varies by lender and case, but typically, £25,000 is the minimum loan for auction finance, with no maximum limit.

Auction finance loan to value (LTV)

Most lenders have a maximum LTV of 80% for auction finance, but you’ll find the most competitive pricing at 75%. If you own a suitable property to use as additional security, some lenders can consider 100% LTV.

Remember that most auction houses require a 10% deposit to secure your purchase on the day, with the balance settled within 28 days. 

What additional fees will I pay?

There are some additional fees to consider when applying for auction finance. These include:

• Lender arrangement fee – generally 1-2% of the loan amount. Depending on the lender, you may be able to pay this upon completion or add it to the loan (but this will count towards your LTV).

• Valuation fees – these vary by lender and property type. Two valuation inspections may be completed pre- and post-works if you refurbish the property.

• Legal fees – paid to your solicitor for completing the legal documentation. Your lender may also require you to pay their side of legal fees. 

• Exit fee – although less common now, some lenders charge an ‘exit’ fee when you repay the loan. Typically, this is equivalent to one month’s interest.

How long does auction finance take?

Designed to work with auction house timescales, we’d expect your lender to release funds within two to four weeks from application.

Who can apply for auction finance?

Individuals, Limited Companies, Limited Liability Partnerships (LLPs), partnerships and trusts can apply for auction finance. Depending on the lender, you can apply as a non-UK national or non-UK resident.

If your credit score isn’t perfect, you may still be able to secure auction finance. However, it will probably impact the interest rate you can secure and possibly the LTV.

Can you get a mortgage on an auction property?

Technically, yes. However, it’s a riskier approach for two primary reasons:

• The property needs to be mortgageable, i.e., liveable. Anything requiring significant refurbishment or development is unlikely to pass valuation inspections for a mortgage.

• Time constraints. It’s not a given that a mortgage lender would be able to underwrite your application (if accepted) and release the funds within a 28-day deadline, whereas lenders offering auction finance have processes that can meet these requirements. If you miss the deadline, you risk losing your deposit and the property altogether.

If you’re purchasing a good quality property that doesn’t need extensive refurbishment, you may be able to secure a mortgage Decision or Agreement in Principle (AIP/DIP) before the auction. This will give you a reasonable idea of how much you can borrow based on your proof of income and affordability criteria. Even with this in place, you risk running out of time if there are delays in the mortgage underwriting process.

What types of properties can you purchase with auction finance?

One of the benefits of auction finance is you can use it to purchase a wide variety of property types, including:

• Single-unit residential property (houses, flats)

• Houses in multiple occupation (HMOs)

• Multi-unit freehold blocks (MUFBs)

• Properties in need of repair

• Semi-commercial property (e.g. a shop with flats above)

• Commercial or business properties (retail units, shops, warehouses, hotels, guesthouses, care homes, offices, pubs, restaurants, farms)

• Land (with or without planning permissions)

Do you pay stamp duty on auction property?

Yes. Usual Stamp Duty Land Tax (SDLT) rules apply when purchasing property at auction. Only properties purchased for under £40,000 are exempt from SDLT. Learn more about stamp duty and check how much you’ll need to pay using our stamp duty calculator.