About Bridging Loans for Buying Auction Property
Bridging loans are a useful finance option for auction sales
Property auctions are popular for sellers who want to sell their property quickly and hassle-free. Often they will be open to accepting a lower price than what they could achieve from selling the property traditionally. This makes property auctions a great place to grab a bargain property very quickly, with no complications such as lengthy chains and mortgage applications.
One of the main reasons many people are hesitant to purchase a property at auction is that they struggle to get the money to fund the purchase quickly enough. If you don’t have large enough savings to purchase the property at auction outright, it can be challenging to find the funding as there usually isn’t time to go through the lengthy mortgage process. This is where bridging loans for buying auction property can come in useful.
What is a bridging loan?
A bridging loan is a short-term finance option that can be used to bridge the gap between more permanent funding options, making them great for purchasing property at auction. They offer loan durations between 1 day and 12 months, making them a short-term solution that can be obtained quickly and easily.
Most bridging loan lenders are able to process applications and release funds within a matter of days, which is ideal if you are planning on purchasing a property at auction. Bank loans and mortgages can also be used for purchasing at auction, but the major benefit that bridging loans have over these is that the application process is much shorter and funds can be released much faster.
Requirements of a bridging loan for buying auction property
If you are over the age of 18 and purchasing a property, the chances are you will be approved for bridging finance. Usual criteria such as income and credit checks are less important to bridging loan lenders as they use the property being purchased as security. Many lenders will even consider those with poor credit history, as the property can be used as collateral in the event of a default on the loan.
Many properties for sale at auction are often run down and in poor condition, and unlike with mortgages, bridging loans can be taken out against properties that are in need of repairs and renovations. If you are looking to purchase a property at auction, with the view to renovate it and then sell it on for a profit, a bridging loan can be the perfect option for bridging the gap between buying the property and reselling it once the work is complete.
What can I receive with a bridging loan for buying auction property?
The majority of bridging loan lenders will lend up to 70% of the value of the property you are looking to purchase, leaving the remaining amount to be funded by yourself. This will depend on the bridging loan lender and your circumstances as a borrower. Usually, there is no maximum loan amount as it is completely dependent on the property’s value, although must bridging loans will have a minimum loan amount of between £10,000 – £30,000 loans.
You can choose between a structured interest rate, rolled up interest rate or retained interest rate, and depending on which option you go for will depend on the amount of interest you end up paying on the loan. Interest rates for bridging loans are usually higher than with traditional bank loans or mortgages because of the short-term nature of them. In addition to high-interest rates, bridging loans usually incur additional charges including arrangement fees, valuation fees, broker fees and exit fees. This makes them a more expensive yet convenient option for purchasing property at auction.To get an estimates of the costs use our bridging finance calculator and see the monthly repayment, interest charges and the total amount payable. Our bridging experts here on Lending Expert can compare bridging finance to find you the best deals and lowest rates.
Advantages of using a bridging loan for buying an auction property
- The application process is quick and simple compared with bank loans and mortgages
- Funds can be released in a matter of days in some cases, making them ideal for purchasing at an auction with little notice
- If you are planning on buying a property at auction for developing and reselling, some bridging loan lenders will base the loan amount on the property’s development value as opposed to the current value
- Auction gives you the added benefit of being a cash buyer with no chain.
Disadvantages of using a bridging loan for buying at auction
- Interest rates and additional charges are high compared with bank loans and mortgages
- They can be easy to default on as the high-interest rates, and short-term durations can be difficult to keep on top of
- You will need to rely on a longer-term finance option or reselling a property as an exit plan
- If you do end up defaulting on a bridging loan, it will have a negative impact on your credit score affect future borrowing.