It seems that everyone these days knows about property auctions. The BBC's main property auction TV show 'Homes under the Hammer' has been going for over a decade now and has ratcheted up over 600 episodes and 1500 properties. And given how much cheaper auction properties can be, it's no wonder that many of us want to purchase at auction. The stumbling block comes when we look at how to finance our purchase.
Many falsely believe that you can't get a mortgage on a property prior to auction. Others fear that they'll win the auction then their finance will fall threw, leaving them in a legal nightmare. However getting finance on an auction property isn't as hard as you think, and often the finance will be as secure as getting a mortgage on a property from an estate agent. You just need to know where to look.
Auctions carry a bit more risk than normal property purchases. You don't know the final price the property will go for until you're in the auction room, so you'll need to agree a maximum price with your lender prior to auction. You'll also have limited time to complete the finance arrangements and if necessary get a structural survey done. Furthermore you'll need to arrange two types of finance: a primary source, and a contingency source such as Readies.com just in case something goes wrong with the first source. As auctions are legally binding it's important that there's no chance the first lender will pull out after you've made the purchase.
Mortgages are always the cheapest way of financing a property purchase. They offer some of the lowest interest rates found anywhere because very few people default, and when they do the banks have your home as security. If you are able to arrange a mortgage in time for the auction this is almost always the best option. You should compare 90% LTV mortgages [you'll need a 10% deposit to pay at the auction] and pick one that is affordable for your own circumstances. Remember that you might not win your property, so try to keep arrangement fees low.
If you've found your dream property but don't have time to arrange a mortgage, or think you can get a better deal after you already own the property, then you could consider taking out an auction bridging loan. These are very expensive forms of finance, with interest rates similar to what you'd pay on a credit card [around 1.6% a month is typical, although if your finances are good you might be a lower rate]. They are also only short term forms of finance, with the longest lasting for just two years. The idea is simply to take out the bridging loan while you get a mortgage arranged.
The problem with bridging loans is that it's not just the interest you'll have to pay. As the loans are typically only for a few months - at most - then the lender will charge for arranging the finance and ensuring that the property you're taking the loan on is a secure asset. It's almost always best to go for a mortgage prior to auction if possible.
If you do go down the bridging loan route, you'll face the problem of needing to pay the interest on both this and the mortgage at the same time. You'll have to convince the mortgage company that you're able to do this. Remember also that bridging loans, like mortgages, use your property as finance. If you default on either then you'll lose your home - so ensure you've got enough savings to make all the repayments on your financing.
It might be a little more complex than the traditional way of buying a home, but the savings you'll make by buying at auction will justify the extra stress and expense of taking out extra finance. Just make sure you've got all the financing in place before you bid.
… written byLaura Browne