I often get asked this question and so I have decided to answer it as best I can below.
Yes, mortgages can be used to purchase properties at auctions. However, doing this can often be a very complex process and you will need to know what you’re doing.
Firstly, you need to be clear on the fact that when you win a bid at an auction you are legally obliged to follow through with the purchase. A 10% deposit usually needs to be paid immediately and the cash will be needed for that. Just like a normal house deposit, some will need to be paid up-front.
In the case of mortgages for auctioned properties, you will need to have a firm and absolutely clear offer agree’d with a mortgage lender. Mortgages will usually take far longer to process than things like bridging loans so the ground work will have to have been done well in advance. It is not usually possible for a mortgage to be arranged within 28 days and that is the usual time-frame somebody has to arrange their finance. If you don’t arrange your finance in that time-frame you will lose your 10% deposit. Therefore, you will usually need experience and a clear idea of what the property will sell for as well as a lot of time spare after viewing the property to arrange the mortgage before it goes to auction.
You also have to bare in mind that when arranging a mortgage you will need a property price to base that mortgage on and the price of the property will depend on the highest bidder at an auction. Your rates will be based on a certain property value. The lender will also need to arrange a valuation which won’t necessarily fully take into account any remedial work you need to do on the property after it is completed.
Finally, mortgages aren’t as flexible as other types of finance. If you are a property developer and have the intention of selling the property on afterwards, you will need to find a mortgage product that has low or no setup fee’s and low or no early exit fee’s. For many property developers/investors, the costs and hassle’s associated with getting a mortgage on an auctioned property make this option not worth the bother.
Bridging loans and other types of property development/auction finance are often found to be far more suited for this purpose. Usually lent on something used as security, they can be agree’d in as quick as 48 hours (even 24 hours in some rare circumstances). Say, for example, you’re looking to do the property up and sell it on within 6 months, a bridge loan might suffice and you may not even need a mortgage.
In other cases where there is no time to get a mortgage, a bridge loan will allow you to get the finance to pay the auction quickly and give you time to arrange a suitable mortgage in the future.
Whether you’re in need of some quick finance for use at an auction, or if you’d like to stay in the property long-term and have the time to arrange a residential mortgage, I can help you with both. You can contact me here, email me on firstname.lastname@example.org or call me directly on 07710 525151.
A lender will have to send their surveyor round to the property