Auction Bridging Finance

Buying a property at auction is a race against time. You have a strict 28-day deadline to complete the purchase, which is almost impossible with a traditional mortgage.

An auction bridging loan is a fast, short-term finance solution designed to solve this exact problem, allowing you to secure your winning bid.

Bridging Loan vs Conventional Mortgage

While both are loans secured against a property, bridging finance and a conventional mortgage are designed for very different purposes. The key differences are in the loan term, cost, and how the lender assesses your application.

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• First-time buyers, home movers and buy-to-lets;
• Employed; self-employed or director mortages;
• Mortgages for non-UK residents or non-UK citizens;
• Bridging loans;
• Bad credit mortgages;
• Guarantor mortgages;
• Joint borrower, sole proprietor mortgages; and
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Why use Auction Bridging Finance?

While bridging loans are ideal for buying at auction, they are also used in other situations where a conventional mortgage isn’t suitable. The main reasons for using bridging finance are:

• Speed: The process is much faster, allowing you to secure a property quickly and compete with cash buyers.
• Property Condition: You can purchase a property that isn't habitable or mortgageable and requires significant refurbishment.
• Short-Term Holding: It is used for projects where you plan to 'flip' the property for a quick profit or to live in it for a short period.

How much can you borrow, and what are the fees?

Unlike a traditional mortgage, a bridging lender focuses on the property's value, not your personal income. They also charge a variety of fees to cover their costs and the short-term risk of the loan.

How much can you borrow?

The loan amount is based on the value of the property involved, which a lender can assess in a few ways:

• Current Market Value: This is what the property is currently worth on the open market.
• Purchase Price: If you secure a bargain at auction, the lender will use the lower of the purchase price or the current market value.
• Gross Development Value (GDV): This is the projected value of the property after you have completed any planned work. Some lenders will loan you money based on the GDV, releasing the funds in stages to help you cover the cost of refurbishment.

Fees and loan structure

Bridging loans come with a variety of fees that are separate from the high interest rate. These often include an arrangement fee (around 2% of the loan), legal fees, and an exit fee (about 1% of the loan), which is paid when you repay in full.

Lenders will typically deduct all fees from the gross loan amount before giving you the funds. You also have a few options for how to pay the interest:

• Rolled up: The interest is added to the loan and paid in one lump sum at the end.
• Serviced: You make monthly interest payments, similar to a regular mortgage.

How to get a bridging loan

Unlike a traditional mortgage, the process for a bridging loan is much faster and more direct. The key steps are:

• 1

  Find a Lender

The first step is to work with an independent mortgage broker. They can access the whole of the market to find a suitable bridging product for your needs, ensuring you get the best deal to meet your tight deadline.

• 2

  Instruct a Solicitor

You will need to instruct a solicitor to handle the legal side of the purchase and the loan. Your solicitor will carry out all the necessary checks and searches and liaise with the lender’s solicitor to make sure all legal paperwork is in order.

• 3

  Lender's Valuation

The lender will instruct a surveyor to carry out a valuation of the property. This survey will be for the lender's benefit and is crucial for getting the loan approved.

• 4

  Funds Release

Once all the legal checks are complete and the lender is satisfied, they will release the funds to your solicitor. This can happen in a matter of days, allowing you to complete your auction purchase and beat the 28-day deadline.

The risks and your exit strategy

While a bridging loan is an excellent tool for buying at auction, it's not without risk. These loans are expensive and are designed for the short term, so you need a clear plan to pay it back. The key risks to consider are:

• High Costs: The combination of high interest rates and fees can quickly become very expensive. You must be confident that the benefits of the loan will outweigh the costs; otherwise, you may not make a profit.
• Exit Strategy: You must have a workable plan to repay the loan, known as your exit strategy. This is typically either selling the property or remortgaging it. If your plan fails, you could be left with a very expensive loan that you can't afford to repay.
• Project Delays: Unexpected delays in your project, such as construction setbacks or a slow property market, could mean your loan term expires before you can execute your exit strategy. Extending the loan is possible, but it will come at an even higher cost.

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