Auction Bridging Finance
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Auction Bridging Finance
Rick Marshall explains auction bridging finance and what to consider.
What is auction bridging finance and how does it work?
Before we even think about bridging finance, let’s briefly run through property auctions. Auctions can be fantastic ways to find some real property pearls, but there are risks involved, as you would expect.
Once you go to a bridging auction and the hammer falls, you’ve legally agreed to purchase a property. At that point, you have a deposit to pay.
If things don’t work correctly, you could potentially lose that deposit, especially as you only have typically 28 days to complete. It just means we need to plan in advance to make sure it all runs very smoothly.
What are the eligibility criteria for auction bridging finance?
It’s a bespoke product, because every client’s circumstances are different and each property at auction is unique. There’s no set eligibility because of that – it’s more around your circumstances, the purchase you’re making and your overall financial situation. Your broker can find a lender to suit those circumstances.
What are the interest rates for auction bridging finance?
In an ever-evolving financial world where rates are always moving up and down, it’s difficult to say exactly what the rate would be.
It’s more important to think about how we look at the interest rate on auction bridging, because it’s charged monthly, rather than annually. The ideal outcome with bridging at auction is to purchase quickly and then refinance or sell within 12 months.
Looking at interest rates on an annual basis is unrealistic – so we look at the monthly interest rate. Rates can vary so much, and that’s where we come in – to make sure we find the best option for your circumstances.
How is the loan amount decided for auction bridging finance?
The ideal scenario for a client is to extract as much cash as possible on day one. You can get up to 80% net of the funds to purchase a particular property.
This is deal specific – ultimately, the amount you can borrow is more focused on the asset than the client. The property valuation is the crucial part in determining the loan size.
What is the repayment period for auction bridging finance?
The standard across the market is 12 months. It doesn’t necessarily mean you’ll need the bridging loan for that long. We need to carefully consider what happens if it goes longer than 12 months, because bridging finance is not the cheapest form of borrowing.
Bridging is there to let you purchase quickly and then look to refinance or potentially sell. 12 months is a good timeframe to aim for.
Are there any additional fees associated with auction bridging finance?
Bridging finance in general is different to standard, regulated mortgages or Buy to Let. We always set out the fees, interest and associated costs to my client right at the outset. We tend to work backwards to make sure this is the right approach for you.
What happens if I need to extend the loan term for auction bridging finance? Can you do that?
You absolutely can do that, but as you can imagine, there would be additional costs. The most important factor is that you need a really strong exit plan from the outset, because you don’t want to have bridging finance for more than 12 months.
It’s all about the exit, and we always discussed this in depth with clients so that you don’t go over the deadline.
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What are the risks involved in auction bridging finance?
The big risk is not meeting the completion deadline. The standard auction deadline is usually 28 days from exchange to completion. From the moment that hammer falls, you have 28 days to complete the transaction.
If you miss that timeframe, there are additional costs and legal implications. That’s the whole purpose of auction bridging finance, to hit those targets – because it would usually take too long to arrange regular borrowing.
Can auction bridging finance be used for non-residential properties?
Yes. Any property can be purchased using auction bridging finance. The circumstances and the type of property you’re purchasing may affect interest rates and charges – but that’s for us to look at and negotiate with the lenders.
How long does it typically take to get approval for auction bridging finance?
This is fast finance – speed is what we’re looking at here. We look to get approval in advance of the auction date and we do that very quickly, even within 24 to 48 hours.
We can get clear indicative terms and a credit backed Decision in Principle, so that you’re going into the auction knowing your maximum bid based on how much you can borrow.
Can I use auction bridging finance if I already have a mortgage on another property?
Absolutely. Auction bridging finance is very much asset related. It doesn’t matter if you already have a mortgage – and in fact it can help to have a mortgage or other investment properties. It shows that you’ve managed those effectively in the past.
Are there any restrictions on how auction bridging finance funds can be used?
Yes. If you’re borrowing to purchase an asset, you need to use the funds for that purpose.
Sometimes, depending on the circumstances, you can borrow for additional costs as well, such as professional costs or funds to complete refurbishment works on a property.
If it’s dilapidated and you’re looking to update it, you may be able to borrow to do that as part of the bridging finance.
What happens if I fail to repay the loan for auction bridging finance on time?
This risk applies to any financial transaction. Bridging is short term, so that’s something I always discuss with clients. We make sure that the exit is really firm and rigid to avoid missing the repayment deadline.
If it does happen, there are additional costs. They will vary significantly depending on the lender, and it’s our job to look into that at the outset. Ultimately, the worst case scenario is repossession.
How can a broker help? Any final thoughts?
With auction bridging finance, there are so many options, lenders and rates, and you could save thousands by taking the correct option. A broker looks at this day in, day out and speaks to lenders to understand their criteria.
There are many potential pitfalls if you haven’t got the right professional team around you. It’s not just your broker – it’s your accountant and your solicitor too. Auction bridging can offer fantastic opportunities, but make sure you have the right team and advice in place.
Key Takeaways
- The primary goal of auction bridging finance is to ensure you meet the typical 28-day completion deadline required after the hammer falls at a property auction.
- A strong, rigid exit plan – such as refinancing or selling – is essential, as the standard loan period is 12 months, and extending the term can lead to significant additional costs.
- Interest on auction bridging finance is charged monthly, not annually, which is the relevant metric to consider when assessing the cost.
- The amount you can borrow is heavily dependent on the property’s valuation (the asset), rather than your personal financial situation, with up to 80% net of the purchase funds potentially available.
- It is crucial to have a professional team in place, including a broker, solicitor, and accountant, to navigate the many options, rates, and criteria to avoid costly pitfalls.
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SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.