How property auction finance works

Buying at auction moves fast. On a traditional auction you exchange the moment the gavel falls, pay 10% on the day, and complete within 28 days. A standard mortgage rarely moves at that speed, which is why most auction buyers who are not paying cash use auction finance.

Auction finance is a short-term bridging loan arranged against the property you are buying. It can be in place before you bid, released quickly after you win, and repaid once you have sold the property or refinanced onto a longer-term mortgage.

What is auction finance?

Auction finance is a bridging loan used to buy property or land at auction. It is short-term — typically arranged over 12 months — and secured against the property itself.

It is also known as auction bridging finance or property auction finance. Buyers usually take it for one of two reasons: to buy and refurbish a property before selling it on, or to buy, refurbish and then refinance onto a buy to let or commercial mortgage as a longer-term hold.

Can you get a mortgage for an auction property?

Sometimes, but it is rarely practical. A traditional mortgage will typically take longer than 28 days to reach offer, and lenders will not lend on a property that is not habitable — no working kitchen or bathroom, structural issues, or a property needing full renovation. A large proportion of auction stock falls into exactly that category.

Auction finance solves both problems. Lenders will lend on unmortgageable properties, and the funding can be in place in time to complete. Once the works are done and the property is mortgageable, you refinance onto the mortgage you originally wanted.

Types of property auction

Traditional auction

You exchange contracts as soon as the gavel falls, and you are in a legally binding contract. You pay a 10% deposit on the day plus the auction house fees, and complete within 28 days. Your finance needs to be prepared before you bid.

Modern method auction

You pay a reservation fee, typically around 5%, then have 28 days to exchange and a further 28 days to complete — 56 days in total. More breathing room, but the reservation fee is usually non-refundable.

Whichever you are bidding at, check the auctioneer’s fees carefully before you bid. They can be substantial and VAT is usually charged on top.

Understanding auction prices

Guide price

Set between the seller and the auction house, based on comparable sales and the property’s condition. It is a marketing figure designed to generate interest, not a valuation.

Reserve price

The minimum the seller will accept. It is not disclosed to bidders, and it has to sit within 10% of the guide price. If the reserve is not met, the property does not sell.

Sold price

The winning bid, typically 15–25% above the guide price. It can go a lot further: we have seen a property guided at £390,000 sell for around £700,000 in the room.

When you are working out whether a lot stacks up, run your figures at 25–30% above the guide price rather than at the guide itself. If it only works at the guide price, it probably does not work.

How much can you borrow?

Typically we see clients borrow up to [X]% of the purchase price, with the ability to fund up to 100% of the refurbishment costs on top, released in stages as the work is completed.

How you handle the interest affects how much you can borrow:

• Rolled or retained interest — the monthly interest is built into the loan and settled when you redeem. You make no monthly payment. This is how most auction bridging loans are structured.
• Serviced interest — you make the monthly payments yourself. If you can evidence affordability, this can lift your borrowing from around [X]% up towards 85–90% of the purchase price.

Loans are available to individuals and limited companies, and where you have additional security available — another property with equity in it — it is possible to fund up to 100% of the purchase price.

How much deposit do you need to buy at auction?

Here is a straightforward worked example on a £100,000 purchase with a light refurbishment:

Stamp duty will usually be at the higher rate for additional property, which is a meaningful cost at this level. You will also have broker and application fees, and you should build a contingency of around 10% into your refurbishment budget.

Use this as a sense check on whether you are looking in the right price bracket before you start viewing lots.

What can you use auction finance for?

Auction finance can be secured against a wide range of assets, and the condition of the property is rarely the obstacle it is with a mortgage:

• Residential houses and flats, including HMOs and multi-lets
• Semi-commercial property — for example a retail unit with flats above
• Commercial property such as warehouses, dental practices and workshops
• Land
• Ex-council, high rise, non-standard construction, and properties you have been told are unmortgageable

It can also fund more ambitious projects — converting a house into flats, converting commercial to residential, or creating an HMO.

Where a project needs planning permission, buying with permission already in place is always the cleaner route. Some lenders will lend where you intend to apply afterwards, but they will want to know your plan B: if permission is refused or delayed while the loan term runs down, what do you do instead? Have that answer ready.

Do you need previous experience?

For a light refurbishment — kitchen, bathroom, flooring, decorating, nothing structural and nothing requiring planning permission — you do not need prior experience. First-time investors are fine.

For heavier projects, expect to put down a larger deposit, and expect the lender to look at whose experience is carrying the project. If it is not yours, it needs to be your contractor’s. Have their track record ready.

Does your credit profile matter?

Most specialist lenders do not work from a credit score. They look at your credit profile as a whole. Missed payments, defaults and CCJs do not rule you out, but the lender will want to know when it happened, how much it was for, why, and whether it has been satisfied.

If you are unsure what is on your file, pull a copy before you apply. Check My File is a useful option because it covers Experian, Equifax and TransUnion in one report, and lenders do not all report to the same agency.

Costs associated with auction finance

• Lender arrangement fee — typically 2%, usually built into the loan
• Valuation fee — payable upfront, depends on the property
• Your legal fees — use a solicitor experienced in auction purchases and bridging
• Lender’s legal fees — sometimes added to the loan, sometimes payable separately
• Broker fees — confirm the amount and when it is payable
• Auction house fees — plus VAT
• Monthly interest — rolled, retained or serviced
• Stamp duty — usually at the higher rate
• Refurbishment costs plus contingency

Your exit strategy

Every bridging lender wants a clear exit. “I might sell, or I might refinance” is not one. Decide before you bid, and be ready to evidence it.

If you are selling, the lender will look at your end value and how realistic your comparables are.

If you are refinancing, expect questions on how the property will be let. On a standard AST, what rent will it achieve? On a holiday let, what are your low, medium and high season rates and your expected occupancy across the year? On a local authority let, what are the lease terms and how long is it for?

Note that many buy to let lenders require you to have owned a property for six months before remortgaging at its improved value. A smaller group — and we work with several — will refinance inside that six-month window, which matters if you are turning projects around quickly and recycling your capital into the next one.

Take a 12-month term with the ability to redeem early at no cost rather than a shorter term that looks cheaper. You only pay interest for the months you hold the loan, and extending an overrunning loan costs more than starting with the longer term.

How to prepare before you bid

Start at least two weeks before auction day.

1. Research the lot properly. View it, assess the condition, get clear comparables for the end value, and speak to local agents.
2. Build your figures. Purchase, refurbishment plus 10% contingency, all fees, end value. Set your maximum bid and do not move off it in the room.
3. Get the legal pack reviewed. Instruct a solicitor experienced in auction purchases who has worked with bridging lenders before. The legal pack contains the title, searches and special conditions, and it is where the problems are.
4. Get tax advice. Personal name or limited company changes your short and long-term position, and once you have exchanged in your personal name you may not be able to change it. This has to happen before you bid.
5. Get your finance pre-approved. Quotation, decision in principle, and all your documents in place, based on your maximum bid.
6. Assemble your team. Solicitor, contractor, surveyor, broker — research each of them.

You may not win the lot, and that is part of it. Far better than winning and then scrambling for finance with 28 days on the clock.

Should you use an auction finance broker?

Auction finance is a specialist market, and a lot of the lenders in it only accept business through brokers. More importantly, the right structure varies a lot by deal — whether you service or roll the interest, whether you use additional security, which lender will take a view on your planning position or your credit profile.

We work across a large panel rather than a single lender, so we can place the deal where it fits rather than where it has to go. We will work through your figures with you before the auction, get you a decision in principle and your documents ready, and submit the moment you have won the bid.