Morgan Stewart shares his expertise on auction bridging finance.
What is auction bridging finance and how does it work?
It’s designed to provide you with finance to buy a property at auction, as usually auction properties have a very short completion time.
When your bid is successful at a property auction, you legally exchange contracts for that property on the fall of the hammer. You need to pay your 10% deposit immediately, and then you have 28 days to complete the purchase of the property. You would never get a traditional mortgage through in this time. Not only that, but often the property is in a bit of a state and will need some TLC.
Who can get auction bridging finance?
Anybody can get auction finance. It might be someone looking to buy a property as their main residence; someone looking to add to their portfolio or somebody looking to flip a property on for profit.
What are the key features of auction finance?
The main benefit of auction finance is speed. You need to work with a lender who can complete within 28 days including any legal work. It’s really important to have a good team of solicitors behind you who can work quickly and efficiently – and that understands bridging.
You will be asked a lot of questions from the bridging lender that you’re not usually asked in a normal conveyancing process. Because of that, most conveyancing solicitors I’ve met are not equipped to deal with auction purchases.
You also need to remember that you’ve exchanged contracts at auction on the fall of the hammer. So it’s crucial that you read that legal pack before you set foot in the auction room. We’ve all seen it on Homes Under the Hammer: there’s usually a reason that property’s in an auction. Either there are problems with the property itself or there are challenges with a legal title.
How do you apply for auction bridging finance?
You can go and find a bridging lender yourself, but I would highly recommend that you talk to a professional broker like ourselves. We understand the timeframes, we understand auction purchases and we can get things done speedily. Plus, not every lender will be able to complete within 28 days.
Some will want to get a valuer to see the property. You need to get signed off as being credit worthy by the lender and you need to do the legal work as well.
We generally use lenders that will indemnify the local authority searches for an auction purchase, because you never know how long those searches are going to take. If you go over that 28 day time frame you will be penalised – you can lose your 10% deposit and be sued by the vendor for any losses.
What fees are involved in buying a property at auction?
Generally there’s a 2% arrangement fee. With bridging finance, interest is paid monthly, from around 0.6% to 1% per month depending on the lender. You’ll have legal fees as well which could reach a couple of thousand pounds depending on the value of the purchase.
You will also need to pay for a survey, the costs of which are usually pegged to the purchase price of the property. On a standard purchase about £200,000, you’ll probably be looking at about £650 for a survey and around £1,200 on legal fees.
The standard Loan to Value for an auction bridging purchase is 75%, but we can get 100% in finance if you have additional security, such as another property in the background that has a low mortgage or is unencumbered.
That of course means there are two properties that need to be surveyed and to have conveyancing work done, so you will need to allow for additional fees.
Is there anything else we need to know about auction bridging finance?
We can get you pre-approved for finance before you go to the auction, which gives you the confidence that you’ve got the funding in place for your maximum bid.
Always read the legal pack, which you can usually download from the auction website. A lot of auctions are now online because of Covid-19, and I think a lot of them will stay online in future.
There’s special software out there that lets you look at all the auctions in the country. You can download all the legal packs, have a read through, and give them to your solicitor to have a read through. There can be some nasty surprises hidden away in those packs and you need to be sure what you’re buying. And always view the property, never buy blind because photos will never show you the full story.
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How much do refurbishment bridging loans cost and how long do they take to go through?
The fastest bridge we’ve ever completed took just five working days from start to finish, including legals. But you will pay more for the loan to complete within that sort of time frame.
If you have time restraints, you need to have good solicitors on board who understand bridging. You can’t use a standard family conveyancing solicitor. The lender also needs to be able to indemnify the searches from the local council because these can take a long time to come back.
Costs can vary. Bridge rates start about 0.6% a month with a 2% arrangement fee but it can go up to 1.2% to 2% a month depending on the type of bridge. Costs also depend on how you set up the drawdowns and other facilities, plus your credit profile.
How do I apply for a refurbishment bridging loan?
It is possible to go direct to a lender – there’s a lot of bridges out there. But the way we add value is with our understanding of the bridging market.
You need to remember that this type of property finance is completely unregulated. You might find lenders say they can do things within your timescales but not meet them. Others may change the goalposts at the last minute, or reduce your Loan to Value before the day of completion.
But we’ve built good relationships over time with the lenders. We understand what they want, what they’re looking for and the best places to find each type of bridge loan.
Most of us in the business have property investor experience and so we’ve used these products ourselves.
What other advice do you have on refurbishment bridge loans?
With a refurbishment bridge loan, what you need to remember is that the interest is usually deducted from the loan. It’s over a set time. If you’ve got a 12 month term they’ll take 12 months’ interest up front – so you end up with less in your pocket on day one. But not making any monthly payments to the lender is handy when you’re doing refurbishments, because they can haemorrhage cash.
When you borrow money it’s always up to a set loan to value, called GDV – Gross Development Value. The money is released in arrears, so you need to have a pot of cash to do the works.
Once the works are done, sometimes the lender will send a monitoring surveyor to check that you’ve done what you said you would, especially if it’s a large project. If everything is in place, they will release the next tranche of funds.
To make a bridging loan work for you, you need to make sure you’ve got the money for the deposit, plus the money for the works. You need to understand what the payments are going to be, when you’ll get paid and if there’s any cost for that drawdown. That’s what we’re here for, and we’ll explain things every step of the way.