Auction Bridging Finance

Auction bridging finance enables you to borrow large amounts of money, quickly. 

The actual amount you can borrow varies between lenders, who set criteria on how much they are prepared to lend. The lender will also state how much of the property value they are prepared to lend versus how much they require from you, as the borrower to put down of your own money.

The lender will also want to know how you intend to pay off the auction finance loan. This is often referred to as your ‘exit strategy’. You may choose to sell the property, or transition to longer term finance such as a mortgage.

As with other types of finance, the lower LTV you choose to borrow at (i.e. the more deposit you provide yourself), the less you’ll need to borrow. This will typically reduce the overall cost of the loan, as the lender will be taking on less risk.

Auction bridging finance is generally a more expensive form of borrowing than a mortgage and it is designed for short term use due to its higher associated costs. This increased cost is largely due to the greater risk to the lender compared to traditional mortgages.

Like any form of lending the interest rates are calculated on the risk of the finance not being paid back. To mitigate this risk, lenders ask you to have a feasible exit strategy when you take out the loan. This usually tends to be one of two things:

• either you plan to sell the property and repay the loan from the proceeds
• or you plan to switch to a longer term form of finance, typically a mortgage.

One of the main benefits of auction bridging finance is the speed at which it can be arranged. Most auction houses require payment within 28 days, which is usually not enough time to arrange a buy to let mortgage.

Auction bridging finance allows you to borrow a large amount of money and can be completed in just a few weeks (sometimes even quicker depending on the situation). Because they are quick to arrange, property investors who spot a bargain at auction are able to get the finance they need quickly.

It’s important to remember that the more complex the case, the longer it may take to complete. Also, the speed of completion will depend on how quickly you provide the required information, or return any paperwork to the lender.

Yes. If you have a poor or bad credit profile you could still get auction finance. While, a lot of lenders won’t help you if you have less than perfect credit, Mercantile Trust considers all credit histories, including those that have:

• Accounts in default
• CCJ’s (County Court Judgement)
• Missed payments
• Historic IVA (individual voluntary arrangement) which is now settled

The cost of auction finance will depend on how much you borrow, how long for and the interest rate.

Just like most forms of borrowing, the more you borrow, the more you will need to repay. The interest rate you pay will also dictate the cost of your loan.

Special borrowing, like auction bridging finance, is typically more expensive per month than a mortgage because interest is applied monthly, not annually. In addition to the interest charges, there are several other elements to take into account such as valuation fees and exit fees.

The only real alternative to auction bridging finance, is to purchase in cash. Some landlords do buy with cash at an auction and then, having secured the property, immediately start to arrange longer-term finance such as a buy to let mortgage.

If you have cash available, this will be the fastest route to settling the auctioneer’s bill, but if you don’t, auction bridging finance could be a suitable alternative.