Auction bridging finance explained

October 11, 2018


Many may overlook the bridging market when considering purchasing property at an auction. This article explains the required criteria and process of obtaining bridging loans in such scenarios.

Similar to bridging loans, the purpose of obtaining an auction loan is to help buyers seamlessly purchase the desired property, enabling them to take hold of the opportunity quickly and under cost-effective terms. However, there are numerous specific differences associated with this method of financing, given that such loans must be tailored to the auction process.

The criteria for such loans are stricter given the pressing time conditions; a deposit must be put down by the bidder as soon as the bid is accepted and the credit provider should be in place before the auction. Upon the fall of the gavel, the winning bidder provides an initial 10% deposit and immediately enters into a legally binding agreement with the auction house, under which they have up to 20 days to repay the outstanding value.

This remaining sum can be covered by a bridging loan, with the purchaser involving the lender in the process from the outset. This is typically achieved by gaining an approved and accurate valuation of the property, subject to which the lender sets credit and affordability checks and the loan-to-value (LTV). The lender would subsequently provide the purchaser with the required capital for the auction purchase, which is then paid back along with the interest.

Whilst standard mortgage rates are lower than those offered by the bridging sector, getting a term mortgage is often not possible in an auction scenario, given the underlying affordability or time constraints, as well as the possible requirement for heavy refurbishment or conversion.

Unlike conventional credit sources that may not be available to some businesses and individual investors, bridging finance can be obtained upon very short notice (with funds being available within 48-72 hours in some circumstances), in turn, making this financing method a readily available and flexible solution for a variety of auction purchases. The increased speed of the process is often attributed to the fact that bridging loans are not based on income or credit history, instead, lenders direct their focus on the presence of a viable exit strategy, such as reselling or refinancing post-conversion.

One does not have to go far to find a recent example of a successful auction bridging loan, with Tiger Financial recently having assisted the purchase of a £675,000 property at an auction. This loan stood at 65% of the total property value and included the funds needed for refurbishment, as well as the associated interest and fees. It ensured that this opportunity was seized in time, in turn, allowing the client to complete the planned renovations and significantly increasing the value of the property upon its sale 6 months after the initial transaction. Upon repaying the bridging loan, the client was able to enjoy a substantial profit, which further proves the suitability of this financing method for the purpose of purchasing property at auctions.