What finance options are there for buying properties at auction?

Friday, 24 February 2012 04:32

A bridging loan can help you buy at auction

A common misconception is that people who buy properties at auction do so with their own cash reserves.

While this is certainly true of some people, the majority have to borrow some or all of the funds, which leads on to the question: How can you fund an auction property purchase?

The answer is that there are several options on the table.

Bridging finance, mortgages, property development finance and savings are just some of the avenues you can explore.

None of the above options are perfect and your decision will ultimately rest on your personal circumstances and what you hope to achieve from buying an auction property.

For example, if your intention is to buy it and then rent it out, a buy-to-let mortgage is the most obvious avenue to explore.

The buy-to-let market has witnessed significant growth in the last decade or so and with homeownership out of reach for large swathes of the population, there is money to be made as a landlord.

However, mortgage lenders prefer to lend to those who have a track record of successful buy-to-let investments, so you may struggle to obtain finance if this is to be your first time.

If you are keen to buy a derelict property and refurbish it, an auction is a good place to go. Refurbishment finance is taken out by many people with such ambitions, however, you will be subject to credit checks and have to satisfy various criteria before you are approved.

The same is true if you decide to take out a refurbishment mortgage. You may also need a sizeable deposit in order to secure such finance, which puts many people off pursuing it.

Credit checks and irregular income are not issues you need to worry about if you opt for bridging finance.

Bridging loans are by far the most common way of funding property purchases at auctions and there are several reasons for this.

As previously mentioned, a poor credit history can be a major barrier to securing the funding that you need, as can sporadic income.

A bridging loan company is happy to ignore such factors provided you have some form of security against which the loan can be secured. In the majority of cases, this takes the form of a domestic or commercial property.

Another reason why bridging loans are such a popular way of funding auction property purchases is that they can be arranged very quickly.

Provided you complete the application properly and provide all of the information requested of you, the funds can be transferred to your account within ten to 14 days in most cases and as you usually have to settle the balance on an auctioned property within 28 days, speed is of the essence.

There are downsides to bridging loans, however, including high interest rates. As bridging loan companies expose themselves to greater risks when lending money to clients, they need to protect their position, which is why interest rates are higher than those attached to traditional bank loans.

A good course of action is to seek advice on bridging loans by speaking to a professional and explaining to them what your ambitions are.

Property auctions offer you the opportunity to secure some superb deals that you would not be able to find anywhere else and funding should not hold you back.

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