In the fast-paced world of real estate auctions, timing is crucial. Buyers often have limited time to secure funding for their desired properties. This is where Auction Bridging Finance comes into play.
What is Auction Bridging Finance?
Auction Bridging Finance is a short-term loan that allows buyers to quickly acquire a property at an auction. It is typically offered for a period of one to twelve months, providing the borrower with the necessary funds to complete the purchase.
How Does Auction Bridging Finance Work?
Unlike traditional mortgages, Auction Bridging Finance focuses on the value of the property being purchased rather than the borrower’s creditworthiness. The loan amount is determined by the estimated value of the property, and borrowers are usually required to provide a clear exit strategy for repaying the loan.
Benefits of Auction Bridging Finance
- Speed: Auction Bridging Finance is known for its quick approval process, making it an ideal choice for time-sensitive property acquisitions.
- Flexibility: It offers more flexibility compared to conventional mortgages, allowing borrowers to secure properties that may not be eligible for traditional loans.
- No Upfront Monthly Payments: In most cases, borrowers are not required to make monthly payments during the term of the loan, providing some financial relief.
- Versatility: It can be used for various purposes, including property development, refurbishment, or purchasing uninhabitable properties.
To qualify for Auction Bridging Finance, borrowers typically need to meet the following criteria:
- A plan for the intended use of the loan.
- Proof of a clear exit strategy for repaying the loan.
- A proof of deposit, usually 30% of the value, plus cost such as SDLT, survey fees and solicitors costs.
- No proof of income is required
The application process for Auction Bridging Finance is streamlined to ensure quick approval. Borrowers are required to provide details about the property, the loan amount required, and their exit strategy.
For example, Madison Carter Finance require:
- An up to date credit file.
- Passport and / or driving license
- Personal bank statement, dated within the last 3 months
If you are a property developer:
- CV and an application form. CV will be only required for property developers
- Assets & Liability (A&L) Summary
On occasion, this can differ.
Interest Rates and Repayment Terms
Interest rates for Auction Bridging Finance may be higher than those of traditional loans due to the short-term nature of the lending. Repayment terms vary but are typically between one to twelve months.
As of October 2023 rates range from 0.55% to 1.25% per month. The factors that affect the rates are property type, loan size, loan to value and sponsor profile.
Risks Associated with Auction Bridging Finance
While Auction Bridging Finance offers numerous advantages, it’s essential to be aware of potential risks:
- Higher interest rates compared to traditional loans.
- Possibility of losing the property if the exit strategy fails.
- Market fluctuations that may affect the property’s value.
Comparison with Traditional Loans
In contrast to traditional mortgages, Auction Bridging Finance focuses on the property’s value rather than the borrower’s credit history, allowing for quicker approvals.
Let’s explore a couple of scenarios where Auction Bridging Finance proved to be a game-changer for property buyers.
Case Study 1: A client purchased a property at auction that needed to be completed in 3 weeks. This was a specification in the sales pack. The borrower required quick money and that costs a little more. We arranged the auction finance in 2 weeks from application and used a partner to arrange the buy to let finance once the works were complete. The client used her own funds to perform the refurbishment.
Case Study 2: A client purchased a building for £1,000,000 in Shoreditch at Allsops auction. They used an auction bridging loan to acquire the site and sold off the residential unit and commercial unit separately over six months and paid back the bridging loan and turned a profit.
Tips for Choosing a Lender
When seeking Auction Bridging Finance, consider the following tips:
- A broker has tacit knowledge of lenders that can perform for such transitions on the best terms.
- That advice can save you thousands of pounds.
Bridging loan brokers have relationships with lenders that may benefit to get the deal done. If you go cold you may not get the same service and could cost you time and penalty if you fail to compete.
Auction Bridging Finance offers a valuable solution for individuals seeking to acquire properties quickly and efficiently. Its flexibility and speed make it an attractive option in the competitive world of real estate auctions.
- Is Auction Bridging Finance suitable for first-time buyers?
Yes, it can be a viable option for first-time buyers looking to secure a property at an auction.
- What happens if I’m unable to repay the loan within the agreed term?
In such cases, lenders may offer extensions or work with borrowers to find a suitable solution.
- Are there any additional costs associated with Auction Bridging Finance?
Apart from interest, borrowers may incur fees for valuation, legal work, and other administrative costs.
- Can I use Auction Bridging Finance for commercial properties?
Yes, Auction Bridging Finance can be used for both residential and commercial properties.
- How quickly can I expect to receive the funds after approval?
The disbursement of funds largely depends on the lender, but it is known for its swift process.