Auction Bridging Finance
Bridging the gap between lucrative finance deals and high-net-worth individuals, investors, and developers in the UK.
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Auction Bridging Finance
Scott West talks us through auction bridging finance.
What is auction bridging finance?
Auction Finance is bridging finance. The differentiating factor is your lender choice.
When you buy a property at auction you only have 28 days from the day of the auction to complete on the purchase. There are exceptions – some will give you slightly longer, but in most cases you need a bridging lender that can turn around that quickly.
There are certain lenders that work much faster than others, so we will tend to go for those ones, as long as there are no other issues with the property, your credit or any other mitigating factors.
Once you’ve won a property, come and chat with us. More often than not, people will send us a link to the auction site before they go. They’ll tell us the lots they are looking at and how high they plan to go. Then we can give them an idea of what the finance would look like for each of their potential properties. It also gives them visibility on what happens if they go above the guide price.
A property might be listed with a guide price of £100,000, but they think they can go to £120,000. We can confirm what the finance will look like, so they can go in well prepared for that bidding war.
Why would you use auction finance? Who is it for?
Auction finance is for anybody who cannot buy in cash or doesn’t want to. Because of the timescale, with 28 days to complete, you’re never going to get a normal term mortgage in that time period. It’s just not possible.
So unless you’re a cash buyer you’ll need to use auction finance to cover the rest of the debt not covered with your deposit.
At auction it’s very rare to see a property that is habitable and ready on day one. Most properties are auctioned because they need work. They’re in disrepair, they need converting or they need shell work, windows and doors. They need significant renovation or they are plots of land that need developing.
Even if you could get a term lender in time, the property is unlikely to be mortgageable. You usually need to do a fair amount of refurbishment for these sorts of properties to get them mortgage ready.
What are the key features of auction finance?
The key feature really comes down to speed. That’s the name of the game – how quickly can we turn this round. Depending on the Loan to Value and the rest of your portfolio, we can sometimes use desktop valuing.
The lender goes online and runs a couple of searches on the property and they get a comfort score. If they think that the auction price is in line with what their software says, nobody needs to go and physically see it. That really does speed up the process and that’s one of the key factors.
As with all bridges, another benefit is that the interest is rolled up, so there’s no servicing during the borrowing period. That allows you to go in and prepare that property for resale or refinance.
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How do you apply for auction bridging finance?
It’s fairly straightforward, as with regular bridging. The best way to do it is to come to us before you go to an auction and show us the lot you’re looking at.
We can advise – we’ve seen a lot of projects from very good to very poor; both profitable and loss-making. So we can give you good guidance straight away on whether we think the project is viable or whether it’s going to be profitable.
It also depends on the client’s goals. Sometimes they’re looking for long-term retention on a property, in which case the yield is very good. We can discuss those aspects with you while exploring finance.
Once you have identified a few properties you want to bid on at the auction, we’ll go through the auction finance with you. We’ll prepare a couple of illustrations to give you an idea of financing costs. Then, depending on your preferred exit routes, whether you’re refinancing or selling, we will show you what the exit will look like in 12 months’ time. So you’ve got both current and future finance options laid out, for a really clear picture of your costings and your future profitability on those properties.
What fees are involved?
It depends on the lender of choice but they’re usually similar. We can expect a 1.5% to 2% arrangement fee, and interest rates are between 0.5% and 1% per month, depending on your Loan to Value. That’s rolled up and included in the total repayable amount.
Some lenders charge exit fees, some don’t. It’s more common to see a lender have a minimum term built in. You only pay for what you use with a bridging loan – if you take it over 12 months but pay it back after six, you only pay six months’ interest. But if you pay it back after one month, the lenders haven’t made much money, so a lot of them will have a minimum term of three months.
So if you borrow today and pay it back tomorrow, you still pay for three months. That covers their cost of lending the money. That’s something to consider – if you are doing a property or project that’s going to turn around very quickly, look for one that doesn’t have an exit fee or include a minimum term.
On top of that are legal fees and valuations. It depends on the number of properties included but we can sometimes negotiate those down a little bit. I tend to estimate maybe £1,000 for legal costs with a bridging loan. You’ll pay both yours and the lenders’ costs, which is then £2,000, assuming there are no other complexities involved. The valuation cost depends on the value of the property itself.
What else should we consider with auction finance?
There are ways of being clever with your portfolio, if you already have a number of properties and assets that aren’t geared particularly highly. If there are properties in your portfolio that are mortgaged at 30% to 50% Loan to Value, you have a lot of equity you’re not using.
In that case we could look to use what we call a cross-charge or cross-collateralisation between securities. So if you want to buy something at auction but you don’t have the deposit to hand, we can cross charge. Let’s say you purchase an auctioned property for say £100,000 – a bridging lender would give you 65% so you need to find a £35,000 deposit.
But if you’ve got other properties, we can essentially grab the equity from them and add it into the bridging loan – so you put no cash in. The lender will then put a charge on the property you’re buying at the auction and a second charge on your other properties. If they’re unencumbered they could first charge.
That allows you to go into an auction without putting any of your own money into the purchase.
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