The Auction Mortgage Challenge
Securing a buy-to-let mortgage for auction property presents distinct challenges not typically encountered with traditional property purchases. The fast-paced nature of auctions, coupled with specific property conditions and lender hesitations, demands thorough preparation and quick decision-making. Buyers must navigate strict deadlines, evaluate risks, and understand how financing options align with auction requirements.
The 28-Day Deadline
With most auction sales you must complete within 28 days of the hammer falling. This leaves little time to secure funds, so advance preparation is essential. Buyers need their own checklist, such as obtaining a mortgage-in-principle, finding a solicitor experienced with auction purchases, and accessing the 10% deposit (typically payable immediately after the auction ends).
Financing delays frequently incur hefty fees or even loss of the property. That’s why bridging loans are a good short-term fix. These loans give you the funds you need to hit the deadline, which can later be re-mortgaged into a long-term buy-to-let mortgage once the property is tenant-ready. Bridging loans are typically repaid within months, but their elevated interest rates make a rock solid exit strategy vital.
Lender Apprehension
Auction properties can be a concern for lenders. Price, condition, location, market value or even lease length can affect their decision to fund. High street lenders in particular are more rigid, while specialist lenders are generally easier on auction purchases.
To alleviate these worries, buyers must supply comprehensive paperwork, such as a professional property valuation and income/proof of funds. Speaking to a property-experienced mortgage broker can help pinpoint lenders who will be compliant to auction timeframes.
Property Condition
Auction properties often need a lot of work, making them unreliably mortgageable. Lenders may simply turn down uninhabitable homes or those with problems like subsidence or Japanese knotweed.
Always have a surveyor inspect the property prior to bidding, as this enables buyers to build in refurbishment costs to come up with the accurate maximum bid.” For homes requiring substantial renovation, bridging loans can again act as a temporary solution, while the property is brought up to mortgage standards.
Securing Your Auction Mortgage
Buying an auction house need immediate finance deals as it’s often a 28-day completion period. Getting the right mortgage is vital to prevent any hold-ups or issues arising, particularly as auction houses frequently have unusual hurdles, including non-standard constructions and structural defects. Below are key steps to help navigate this process effectively:
- Use a mortgage broker to find lenders used to auction properties.
- Shop around for competitive auction finance rates and terms.
- Get pre-approved or have a mortgage agreement in principle arranged prior to bidding.
- Consider bridging loans as a short-term option if mortgages aren’t appropriate.
1. Pre-Auction Finance
Having an AIP (mortgage agreement in principle) before going to auction makes you a more credible buyer. This is how much a lender will lend you, pending final checks. If time pressures render traditional mortgages unfeasible, bridging loans provide an interim fix, releasing cash for you to secure the purchase. These loans tend to cover up to 12-months, offering some flexibility.
Weighing up initial expenses is important too. There’s usually a 10% deposit on the day as well as fees for a valuation and legal fees. Using a specialist broker, you can choose financing that fits your requirements, whether it’s a Buy to Let mortgage or something else.
2. Scrutinise Legal Packs
Auction properties come with legal packs that contain important information including title deeds, lease lengths and planning permissions. Going through these meticulously can expose red flags such as restrictive covenants or short leases that could put off lenders.
So, properties near flood zones, or those with invasive plants, may find it difficult to get a mortgage. Consultation with a solicitor demystifies the terminology and guarantees good, informed choices.
3. Arrange a Valuation
An independent property valuation establishes its market value and satisfies your lender’s criteria. It’s a critical stage since lenders might decline properties with severe defects, for example, those located close to mines or landfill sites.
Include valuation fees in your budget. The valuation assists with investment viability, in particular with Buy to Let properties where rental income estimates are critical.
4. Finalise Your Bid
Determine a maximum amount you’re willing to spend based on your budget and research. Don’t let emotions get in the way of bidding, run the numbers on potential rental yields or resale value to help inform your bid. Being prepared to bid on the day is vital to get the property.
5. Complete the Purchase
Get all your paperwork sorted before the 28-day deadline. Be in close contact with your solicitor and transfer funds immediately. Protect your investment straight away by taking out insurance.
Unmortgageable Auction Properties
Certain auction properties are categorised as “unmortgageable” by lenders. That is because they are what the industry calls ‘unmortgageable’ for reasons of being high risk. They’re appealing to investors looking for renovation or redevelopment opportunities, but there’s a lot of risk and complication involved. These types of properties can be critical, but buyers need to weigh up such properties against structural, legal or financial issues.
Structural Defects
- Severe damp or water damage compromising the building’s integrity.
- Cracks in walls or foundations indicating potential instability.
- Roof defects, such as sagging or missing tiles.
- Substandard construction materials, including asbestos or outdated wiring.
That’s a must before you place a bid – getting a professional structural survey. An expert in surveying like Vic can spot underlying problems and report on how extensive the damage is. Buyers should work out repair costs and factor these into their overall budget, so they’re not stung with the expense. Bidding on properties with outstanding structural issues is very high-risk, as repairs can get expensive fast and eat into your profits.
Legal Issues
They might have legal issues, like disputed ownership or restrictive covenants on what you can do with the property. These issues can hold up or block a mortgage offer. It’s vital to consult an experienced property solicitor to investigate these and their impact. Legal issues can be protracted and expensive, making them unviable for those without the expertise or budget.” Stay clear of properties with murky or convoluted legal histories, unless you’re willing to take on the difficulties.
Uninhabitable State
Auction properties labelled unmortgageable – those without running water or in disrepair – are usually excluded from normal mortgages. Buyers need to factor in the cost and practicality of making the house liveable. Specialist lenders will lend too, but usually at much higher rates and with less favourable conditions. This ramps up the cost, so make sure you do your maths.
Short Leases
Short leases (less than 70 years) are a common reason for mortgage refusals. Prospective buyers need to check the feasibility and expense of extending the lease prior to or following the purchase. Not factoring in any lease extensions could be detrimental to the sale of the property and/or the re-saleability in the future.
Bridging Finance vs. Mortgages
If you’re buying auction properties, it is crucial to understand bridging finance vs mortgages. Both have their uses, and which is more appropriate will depend on your personal circumstances and the auction process. Below is a table summarising the benefits and drawbacks of each:
| Aspect | Bridging Finance | Mortgages |
|---|---|---|
| Purpose | Short-term funding (up to 1 year) | Long-term financing (25–30 years) |
| Speed | Quick access to funds, often within days | Slower process, typically weeks to months |
| Interest Rates | Higher (starting at ~6.72%) | Lower (starting at ~5.22% for Buy-to-Let) |
| Repayment | Lump sum at end of the term | Monthly repayments |
| Flexibility | Fewer restrictions on credit, income, or property | Stricter eligibility criteria |
| Use Cases | Ideal for auction purchases or bridging property gaps | Better for stable, long-term investment |
Bridging finance provides a rapid and adaptable answer, which is why it’s so popular for auction purchases. Auctions frequently stipulate completion in 28 days, while traditional mortgages might not fit that timetable due to protracted approval processes. Bridging loans can be secured quickly, helping buyers meet deadlines. They’re asset-based, so a decision is based on what the property is worth, not your salary, making them easier to acquire for certain buyers.
Bridging loans are expensive. Interest rates are higher than mortgages, starting around 6.72%, and the loan term is short – typically under a year. They’re frequently used to bridge opportunities, like buying a property before selling another one, or fixing delays in property chains. The interest is generally rolled up, so you repay it all in one lump sum at the end of the term and need to plan carefully.
Mortgages (including Buy-to-Let) are cheaper for longer term investment. Interest rates are lower, from around 5.22%, and repayments over decades. They’re income-based and have tougher requirements. Not all lenders back auction properties, so this solution may not be plausible for auctions with short completion periods.
Budgeting Beyond the Hammer
When buying auction property with a buy-to-let mortgage, budgeting goes well beyond the hammer price. Auction properties frequently have unanticipated costs, short windows and financial pitfalls, all of which must be expertly navigated. Having a budget in place is essential to facilitate an easy purchase and steer clear of costly surprises.
Auction House Fees
Auction house fees are another important factor. These usually include a buyer’s premium – often 5-10% of the purchase price – and admin fees that vary by auctioneer. Always consult the auction catalogue for a detailed list of specific fees before bidding. For example, if you bid £150,000 on a home, a 5% buyer’s premium could slap on £7,500. Crucially, these fees are payable upfront and non-refundable, even if the sale doesn’t go through. To prevent overspending, include these in your ceiling from the start.
Essential Refurbishments
Auction properties tend to need a fair bit of refurbishment, and so that should be made a priority, methodically. Think urgent repairs first – rewiring, replumbing, or serious structural work such as a new roof. For example:
- Roof repairs to prevent leaks.
- Electrical rewiring to meet safety standards.
- Plumbing upgrades to ensure functionality.
Get contractor quotes before bidding to gauge costs accurately. A house that requires a new roof and plumbing upwards of £15,000. Think about rental yields and property value appreciation to evaluate if these are worth it.
Void Period Costs
Void periods – when the property is empty – can put a strain on finances. Even while vacant, you’ll need to pay a mortgage, utilities and maintenance. For instance, a £600 mortgage and £150 of utilities could add up to £750 a month. To reduce void periods, commence marketing the property to tenants or buyers during the renovations. Rent guarantee insurance, while another cost, can protect income in these times.
Contingency Funds
| Allocation Example | Percentage | Purpose |
|---|---|---|
| Essential Repairs | 10% | Roofing, plumbing, electrical |
| Unforeseen Legal Fees | 3% | Disputes, documentation |
| Additional Finance Costs | 2% | Interest rate changes |
Set aside at least 10-15% of your overall budget for contingencies. Don’t bleed that budget dry on non-essential items either, auction properties could throw up surprises such as structural damage or unpaid debts.
Post-Auction Lender Hurdles
Getting a buy-to-let mortgage after winning an auction is more tricky, though, as the deadlines and requirements are stricter. Auction purchasers are expected to buy within 28 days, clashing with the slower turnaround times of standard lenders. That means prior planning and quickfire purchasing to prevent losing money – for example if you’re outbid and lose your deposit.
Traditional lenders can be nervous of the condition or legality of auction properties, as they’re often sold “as is” with no proper surveys. Structural problems or lack of planning permissions, for example, can put lenders off or cause them to impose more stringent loan conditions. Dealing with these problems in advance by commissioning thorough surveys of the properties and checking legal documentation can help assuage lender fears. Buyers will have to be in a position to offer a bigger deposit – generally 10% of the purchase price, which can be a barrier for those with little cash up front.
To facilitate the mortgage process, buyers need to have their paperwork well under control. That means pay slips, bank statements and proof of deposit funds. First-time investors, specifically, could expect some extra probing, and would have to show “very strong financial profile”. Hold-ups in issuing these documents can jeopardise the sale, as missing the 28-day completion period usually means being fined or losing your deposit.
Due to the intricacies of post-auction lending, enlisting the help of a specialist broker is highly recommended. These brokers are used to dealing with lenders and know which ones will be amenable on auction timescales. They might, for example, suggest alternatives such as bridging loans, which are a form of short-term financing until a long-term mortgage can be obtained. Buyers should not be naive and assume bridging loans are not more expensive overall (higher interest rates).