Property auctions are not solely for investors and landlords. Anyone can buy at a property auction, so if you want to know how you can get a mortgage on auction property, read on.
Is buying at auction the same as buying on the open market?
There are some big differences between buying at a property auction and buying on the open market.
Timescale
The sale process is much quicker when you buy at auction.
You will need to have a 10% deposit ready because you will need to pay it as soon as you have won the bid. On the day of the auction, you will also need to show evidence that you can pay the remaining 90%.
The balance will need to be paid within the following 28 days. If you fail to do this, you will lose your deposit, and you may have to pay the administrative costs involved in resale.
Condition
While it’s true that anyone can buy at auction, doing so tends to be popular with landlords and investors.
This is because many properties that come up for auction are uninhabitable. They are typically snapped up by property developers looking to refurbish and sell on at a profit.
A lender may not give you a full mortgage on a property that cannot be inhabited immediately, so your choice could be limited.
Unforeseen or unusual problems
Many properties sold at auction might seem ok, but have unforeseen or unusual issues that make them unattractive for a lender. These issues could include the following:
- Subsidence
- A flat with a very short lease
- Non-standard construction that has decayed over time
[top_pitch]
What are my options in terms of finance?
There are two well-known types of finance you can use when buying a property at auction.
1. Mortgage in principle
You can get what is known as a mortgage in principle (MIP) on an auction property. This is a written estimate issued by the lender which states the amount they will lend to you for the purchase of the property.
When you go to the auction, you can use the MIP certificate as evidence that you will be able to pay the remaining 90% in 28 days.
However, before you use this method, make sure you understand the following:
- The MIP will be based on what you can afford, and the value of the property. It is not based on what you end up paying for the property. You need to bear this in mind before the bidding starts.
- While it’s a good indication, an MIP is not a guaranteed amount. If there are unforeseen problems with the property or your finances, the lender may reduce the amount or withdraw their offer.
- You need to make sure you have additional finances to pay for surveys, legal fees and stamp duty.
Auction finance or a bridging loan
This is a large short-term loan that allows you to complete the sale in 28 days. You then have time to apply for a conventional mortgage.
This type of loan is offered by specialist lenders that can be found online. Before applying for this type of loan, you need to be aware of the following:
- The interest rate is high when compared to other borrowing methods
- You will need to secure the loan against an asset, such as your home
- This type of loan should be used as a short-term solution. Make sure you have a plan for paying back the loan before you apply.
[middle_pitch]
What do I need to do before the auction?
You will need to do the following prior to the auction:
Arrange the finance
Make sure you arrange finances for the deposit, legal fees, surveys and stamp duty, as well as for buying the property.
Do the research
Make sure you undertake as much research on the property as is necessary. Make sure you know everything you need to know about the property. Get surveys and searches done.
This will take a lot of time and effort, but it is definitely worth it. Thorough research will prevent you from being stuck with a property with a serious issue that could cost you thousands.
Have a plan of action
Before the auction, you will know your maximum bid. Make sure you stick to it and don’t get carried away.
Take home
You can get a mortgage on an auction property, but it will take some planning and organisation. If you can, visit a property auction before you buy just to see how it works.
If you want further information on mortgages, check out our complete guide to mortgages. The Money Advice Service also has some useful information.
