A guide to bridging loans & auction finance

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There are many options for short term property finance and two of the most commonly utilised products across the UK are bridging loans and auction finance.

Using a bridging loan has become much more straightforward than in previous times. With the UK bridging industry worth more than £4 billion, the demand for these short term property loans is vastly increasing. This is partially due to these loans being diverse and able to be widely utilised for numerous purposes.

Auction loans on the other hand are a more specific offering than bridging loans. Tailored by their very nature to cater for the needs of those purchasing properties at auction, these auction-specific loans can be very powerful tools.

Whilst auction loans are often seen as an extension of bridging loans, they, unlike conventional bridging finance have much stricter time constraints and they also require a degree of extra commitment from the buyer.

Bridging Loans

Bridging loans’ main purpose is to literally ‘bridge’ the gap between property transactions and to tide over a buyer, not leaving them left out. These loans are often used in cases where a property’s sale is all but complete, with a subsequent property lined up but where there is an element of ‘chain breaking,’ i.e. someone in the chain of transactions pulls out late on. In such cases, were it not for bridging finance, the owner of the initial property looking to purchase the subsequent one would lose out.

Another case where property owners may need to look towards bridging loans is where they are purchasing a property that is funded by the sale of another. The bridging loan sees them through and provides the money to buy the new property until such time they have sold their current property.

For example, a homeowner is looking to upsize from a 2-bedroom house to a 3-bedroom house. Their current property is worth £500,000 and the new, 4-bedroom house they wish to purchase is £800,000. They will need the money from the sale of their initial property to fund the majority of the new property’s purchase.

They have a buyer lined up but the property they wish to purchase has time constraints on it due to many interested parties. Rather than having to lose out while they wait for their first property’s buyer, they can take out bridging finance. The bridging loan would cover the full £800,000 cost of the new property and upon the sale of their current property, they would repay the majority (£500,000) of the loan with the remainder being repaid through refinancing the new property for the outstanding balance, in this case £300,000 plus interest.

Ultimately, this allows the homeowner to purchase their desired property, whilst not losing out due to budgetary and time constraints. When applying for bridging loans however, lenders will always require some form of ‘exit strategy,’ which allows the borrower to ‘exit’ the loan. This tends to be satisfied through the sale of a property or high value asset.

Auction Loans

Auction loans serve a similar purpose to bridging loans in that they help buyers purchase the property they need in quick time, allowing them to not lose out. Being tailored to the auction process however, means there are a number of specific differences with this type of finance. Furthermore, the criteria are a fair bit stricter and require a deposit be put down as soon as the bid is accepted and the gavel falls on the winning bid.

The purchaser must have a 10% deposit immediately available and once the gavel falls, the winning bidder enters into a timed and legally binding agreement with the auction house. They must provide the 10% there and then at the auction house and from there they have up to 20 days to repay the outstanding value and this is where auction finance comes in.

For example, a bidder purchases a property at auction for £500,000. They must have £50,000 available straight away for the auction house as a deposit that must be paid there and then. There is then an outstanding £450,000 that they must account for and so they seek auction finance. The finance provision should be in place before the auction so the process is started well in advance.

A lender provides the purchaser with the £450,000 they require for the auction purchase and this is paid back plus interest. As part of the process however, the purchaser needs to involve the lender from the outset. This means going with an approved valuer to the property’s viewing to get an accurate valuation of the property. then, subject to the valuation, credit and affordability checks and the Loan to Value (LTV) of the loan set by the lender, the money is provided.

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