Bridging Loans For Auction Properties
However, buying a property at auction comes with additional risks and challenges. When the hammer falls, you must have robust plans to fund the property sufficiently. And consider also the need for renovation or repair down the line.
Traditional finance is too slow to move in this scenario. Therefore, a bridging loan specifically for properties bought at auction is often a necessary step in paying the total amount required.
What are the benefits of a bridging loan for auction properties?
A bridging loan offers flexibility, speed and the ability to snap up a good property opportunity at auction.
The right bridging loan will undoubtedly give any individual the finance needed for such a purchase, and there are many benefits to be gained.
- Swifter than traditional finance – for a bridging loan, lenders can release funds within the short time frame that is required to make payment after the hammer falls. When a property is bought at auction, you have 28 days to pay the total amount. Alongside a non-refundable 10% deposit upfront. Additionally, a decision in principle can be made beforehand – it is ideal to go into an auction prepared; conditional offers of agreement can be arranged subject to the evaluation of the property bought.
- Participation in a competitive market – without proper financing, it is impossible to go into an auction environment and reasonably bid on a property. A bridging loan will allow you to participate, snapping up a potentially undervalued property.
- Financing unmortgageable properties – typically, properties up for auction may need renovations or repair. Properties that are not up to a liveable standard will be unmortgageable through traditional finance. A bridging loan will allow time and costs covered for any work that may be necessary for the property.
- “Rolled-up” interest – for a bridging loan, interest is paid only on the days the loan is outstanding – essentially being “rolled-up” and paid at the end of the bridge term. Traditional mortgages do not allow for deviation from a long term repayment plan. Chiefly, this means that there are no monthly interest payments to be made on your property bought at auction – freeing up funds to be spent on property development, repairs or renovations for an eventual sale.
Are there risks involved in a bridging loan for auction properties?
While a bridging loan is flexible and a popular option for property buyers, there are some things to bear in mind.
It is advisable to have an 'agreement in principle for your bridge loan before you go to auction. When you make a successful bid, your deposit is non-refundable and you'll be locked in. You don't want to be in this situation without the appropriate finance in place.
While a potentially undervalued property at auction is an attractive prospect, it may be in an unmortgageable state. Moreover, there will be significant costs involved in getting that property up to the necessary standard.
You should always anticipate delays and unexpected costs. For a project to be successful, you must bear in mind your repayment plan – any deviation can result in going over the loan term period. This will be an expensive situation to be in due to the interest rates long term.
You will need to determine whether or not a bridging loan is feasible and repayable for you and if it is the appropriate financing solution.
Securing a bridging loan for auction properties
It is helpful to seek expertise in the form of specialist brokers to aid the process and secure the best bridging loan for you.
If you want to complete an auction property purchase in the near future, we have strong relationships with lenders offering bridging finance to suit this scenario.
We can identify and secure the best solution for you from across the short-term finance market.