Purchasing property at auction can be an exhilarating experience. It offers the potential for a great deal, but also comes with its own set of challenges, particularly when it comes to financing.
Traditional forms of borrowing, like mortgages, are often not suitable due to tight auction deadlines – you simply can’t arrange one quickly enough.
This is where bridging loans come into play.
Understanding Auctions and Their Challenges
When you buy a property at auction in the UK, you are required to:
- Pay at least 10% of the purchase price immediately after winning the bid.
- Settle the full payment within around 28 days of the auction’s conclusion.
These strict timelines can make it challenging for buyers to secure traditional financing, given the extended application and approval processes associated with regular mortgages.
Most mortgages simply can’t be arranged that quickly with the income to loan calculations, background and credit score checks as well as the property surveys and valuations.
Enter Bridging Loans
Bridging loans offer a solution to this problem. Designed to “bridge the gap” when funds aren’t readily available, these loans provide the speed and flexibility needed to meet the stringent auction timelines.
What is an Auction Bridging Loan?
Auction bridging loans are:
- Fast: They can be arranged in just a few days.
- Flexible: They can cover the full purchase price and associated costs such as legal fees, stamp duty, and auction fees.
- Short-term: Terms can range from 3 months to 3 years (but are most commonly 12 months)
- Secured: They are typically secured against the value of the property being purchased, and/or other property in the background.
How Do They Work?
- Application: Apply with a lender who evaluates your financial health and the property’s value.
- Valuation: The lender determines the loan amount based on the property’s value and their set criteria.
- Offer: Once approved, the lender makes an offer outlining loan details. After accepting, you provide any necessary documentation.
- Completion: Secure the funds, often within a week, and purchase your auction property.
- Repayment: Repay the loan at the end of its term. This can be done through the property’s sale, refinancing, or other financial means. You’ll also pay for the interest on the loan at this point as it’s generally rolled up to the end of the loan term.
Bridging loans, while convenient, come with their own cost structure:
- Loan Amount: Larger loans have higher monthly repayments because of the interest calculations.
- Interest Rate: Generally higher than traditional mortgages because of their short-term nature and associated risks – interest rates are quoted monthly, not annually, so watch out for this.
- Additional Fees: These can include arrangement fees, valuation fees, and legal fees, among others.
It’s crucial to understand these costs and ensure you can repay the loan within the given timeframe. Consulting with a bridging loan expert can provide clarity.
And remember, although bridging loans are expensive, they also create opportunities that can’t otherwise be taken – such as securing a great deal on property at auction.
If there’s no other way to finance the property (other than having the cash on hand), then you simply can’t buy it. This is where bridging loans open up a world of opportunity and flexibility in the property market.
Interest Payment Structures
Different interest payment options are available:
- Monthly Interest Payments: Regular monthly payments throughout the loan term.
- Rolled-up Interest: No monthly interest payments. Instead, repay the full loan amount plus accrued interest at the end.
- Retained Interest: Deduct interest from the loan amount upfront, rather than adding it to the loan total.
Many people choose to roll up the interest in order to free up their cash for moving costs, refurbishments, or other home-buying expenses.
When, when your traditional mortgage comes in, you can repay the interest when you don’t have other pressing costs to worry about.
Auction bridging loans can finance a variety of property types:
- Residential: Houses, Buy-to-Lets, HMOs, etc.
- Commercial: Offices, retail spaces, and warehouses.
- Land: For development or other purposes.
- Refurbishment Projects: Increase property value through renovations.
Hundreds of properties go to auction every day across the UK, so the investment opportunities and living opportunities are fantastic. Bridging loans give you the tools to pounce on those opportunities and start your property-buying adventure.
Purchasing a property at auction offers potential benefits but comes with its set of challenges, particularly around financing.
Bridging loans, with their speed and flexibility, provide a viable solution to these challenges. However, they must be approached with a clear understanding of costs and repayment structures.
That’s why partnering with specialists, like Clifton Private Finance, can be invaluable in navigating this landscape, ensuring you secure the best loan tailored to your needs.
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