Using A Mortgage To Buy At Auction

You may be wondering ‘Can I buy a property at auction with a mortgage?’ The short answer is yes. Buying at an auction is different from the traditional route in that you usually have 28 days to complete once the hammer falls and you’ve exchanged contracts. This means that you need a mortgage in principle in advance so that your finances are in place for a quick completion. You also need to find a lender who’s used to dealing with auction purchases and can process your mortgage quickly. That’s where we come in.

As experts in auction finance, we understand how quickly the process moves when purchasing a property at auction. Our specialist brokers ensure that you have your mortgage in principle before you attend the auction. They can also arrange a property valuation before the auction date. We work closely with lenders who handle mortgages for auction purchases so you can rest assured that your mortgage will be processed as quickly as possible.

Here, we’ll explain the auction timescales to choose from, how you can prepare in advance to save time with the mortgage process, the mortgage costs to budget for, the mortgage restrictions when buying at auction and short-term finance that you may wish to consider while your mortgage is being arranged.

Why buy a property at auction?

There are various advantages to buying a property at auction, making the use of a mortgage to buy at auction an increasingly popular option. These benefits include speed, transparency and the opportunity to find a bargain.

Speed

Buying a property at auction is a much faster process than buying one the traditional way. You don’t have to spend time negotiating on the price as you’re bidding at the same time as the other bidders. You also don’t need to worry about being stuck in a chain or being gazumped before your purchase has been completed. There’s a strict completion deadline to adhere to, depending on the type of auction sale you opt for, which we’ll explain in more detail later on. This means that within just a few weeks of successfully winning a bid, you could own a property that you found via an auction.

Transparency

Auctions offer transparency when buying a property and there are various ways to do your due diligence before the auction. You can view the property before the auction date and instruct a surveyor to check its condition. A surveyor will flag any issues that you may be unaware of, such as damp, subsidence or Japanese knotweed.

You’ll be provided with the legal pack before the auction, which forms part of the contract. This needs to be checked carefully, paying particular attention to the special conditions. It’s recommended to ask your solicitor to check the legal pack too. Any last-minute changes will be listed on the Addendum, which also forms part of the contract, so you need to check this as well.

Cheaper prices

Auctions are a great place to find cheaper properties as they’re usually listed below the market value. As well as benefitting from cheaper prices, you tend to find more unusual properties that aren’t usually listed via estate agents and are, therefore, otherwise overlooked.

Prepare in advance of the auction

Speed is one of the main advantages of buying a property at auction yet arranging a mortgage can take time. Therefore, to save some time with the mortgage process once you’ve bid successfully on a property and to help prevent any issues from cropping up, there are a couple of things you can do to prepare before the auction. One is to arrange your mortgage in principle and the other is to have a property valuation carried out.

Arrange your mortgage in principle

A mortgage in principle lets you know what amount the lender is prepared to loan you for a property. When you take it with you to the auction, it provides proof that you have adequate finances in place for the property you’re bidding on. We can arrange this for you so that you know what budget to stay within when bidding on a property.

Arrange a property valuation

As well as getting your mortgage in principle before the auction, it’s a good idea to have a mortgage valuation carried out on the property before the auction date. A valuation establishes the value of the property. Lenders require mortgage valuations to be done as part of the mortgage terms. Therefore, having the valuation carried out in advance ensures that the lender won’t retract the offer at a later date and also saves time before completion. Our mortgage brokers can liaise with the lender to arrange this on your behalf.

Mortgage and auction timescales

As mentioned above, mortgages take time to arrange, normally ranging from 18 to 40 days. This means that you might be concerned about the short auction timescale to complete on your purchase. We work closely with lenders who are used to handling mortgages for property auctions and processing them quickly. As such, our mortgage brokers will recommend a mortgage deal that best fits your requirements and circumstances. There are two types of auction sales to consider, each offering different timescales — a conditional auction sale and an unconditional auction sale.

An unconditional auction sale

This is the traditional auction method. With an unconditional auction sale, you have to pay a 10% deposit as soon as you win the bid. The contracts exchange immediately and you then need to pay the balance of the purchase price within 28 days. This is why it’s essential to arrange your mortgage in principle in advance and to use a lender that’s well-versed in dealing with auction purchases.

This auction method is ideal for cash buyers or investors who are used to dealing with the fast auction process. However, when you’re using a mortgage to buy at auction, you may prefer the modern auction method.

A conditional auction sale

A conditional auction sale is the modern method. It provides you with more flexibility as well as a longer completion time, making buying a property at auction with a mortgage much more accessible. You pay a reservation fee once you’ve won the bid and sign a reservation agreement. The reservation fee is usually about 3–5% of the purchase price, subject to a minimum amount. You should be aware that this is payable on top of the purchase price and is usually non-refundable.

You then have 28 days’ exclusivity to secure your mortgage finance before the contracts are exchanged. Until this happens, you’re not legally committed to complete the property purchase. Instead, the property is reserved for you, giving you peace of mind that you won’t be gazumped while your mortgage is being processed.

After that, the sale must complete within the next 28 days. This is ample time for your mortgage to be arranged so you may prefer to opt for this method rather than the traditional one. It also gives you time to arrange your property insurance and liaise with your solicitor. We can recommend a solicitor for you if you don’t already have one and can also arrange your insurance cover.

Having this longer 56-day timescale gives you more breathing space and added flexibility compared with an unconditional auction sale. It’s also still a fast way to buy a property when you compare it to the general timescale for buying one on the open market.

What happens if the mortgage can’t be arranged in time?

If you’ve opted for an unconditional auction sale, many lenders will struggle to meet the short 28-day timescale. However, at Trinity Finance, we deal with lenders that specialise in getting mortgages processed quickly for auction purchases. We’ll ensure that we approach these lenders on your behalf for a quick turnaround. Choosing a conditional auction sale, on the other hand, gives a lender much more time to process your mortgage. This allows more time for any unforeseen issues to be dealt with and removes any worry about the possibility of not meeting the short completion deadline.

Provided that adequate preparation has been done to ensure that the mortgage process moves swiftly once you’ve successfully bid on a property, a lender specialising in auction purchases should be able to meet the deadline. Should anything prevent them from doing this, however, get in touch with your solicitor to discuss your options. It may be, for example, that the seller will be prepared to agree on a new completion date. If there aren’t any options available and the lender can’t complete on time, you risk losing your deposit as well as the property. The seller may also make a claim against you as they’ll be entitled to recoup any losses as well as charge you for the costs of selling the property again.

Short-term finance

Whether you choose a conditional or an unconditional auction sale, you may prefer to use short-term finance while waiting for the lender to arrange your mortgage. An example of this is a bridging loan. This is much quicker to put in place than a mortgage and allows you to finance the cost of the purchase, bridging the gap until your mortgage is secured.

Due to the convenience of a bridging loan, it has a higher interest rate. As such, your auction finance broker will advise you on the optimum term to secure this for before your longer-term finance is ready. That way, you can benefit from the speed and flexibility that a bridging loan offers without paying for the higher interest rate longer than you need to. At Trinity Finance, we specialise in all types of auction finance so we can arrange this for you before you head to the auction.

What mortgage costs are there?

As well as paying a deposit, interest will be charged on your mortgage loan and there are other mortgage costs to budget for. These include:

• An arrangement fee: This fee is charged by the lender for arranging the mortgage.
• A valuation fee: A valuation is required by the lender as it determines the value of the property.
• A survey fee: You should instruct a surveyor to check the condition of the property before attending the auction. This will raise any flags, highlighting issues that may jeopardise your mortgage arrangement.
• Buildings insurance: Although buildings insurance isn’t mandatory when buying a property, it is usually required by lenders before they will agree to provide a mortgage.
• Legal fees: This covers the costs for your solicitor to handle the purchase transaction.
• Stamp duty: When buying in England or Northern Ireland, you may be liable for stamp duty depending on the property and your circumstances. In Scotland, you may be liable for Land and Buildings Transaction Tax (LBTT) while Land Transaction Tax (LTT) may apply to you if buying in Wales.

When can’t you use a mortgage to buy at auction?

Lenders generally provide mortgage agreements for properties that are in good condition. That is, they are considered to be of an immediate liveable standard. Some of the properties commonly offered for sale at auctions include tenanted properties (which are suitable for buy-to-let mortgages), properties that have been repossessed and are being sold by a lender and properties that are being sold by relatives of the owner who has died. Lenders are generally happy to provide mortgages for these three types of property.

Some properties, however, are unmortgageable. There may be Japanese knotweed on the grounds, for example, or a property may have subsidence. We recommend that you have a survey carried out on the property before the auction date. This ensures that you are fully aware of any issues you may be faced with. Dilapidated properties are not usually acceptable for mortgage purposes due to the costs involved in renovating them into a liveable condition.

If you’re specifically looking for a renovation project, we can arrange alternative auction finance for you, such as a commercial loan. After sufficient improvement to the property, you can then refinance to a mortgage if you want to. A renovation project is where the bridging loan we mentioned earlier is useful. This is because you can complete sufficient work before switching to your prearranged mortgage.

Another reason that a property may be unmortgageable is that it has a short lease. Be sure to check the property details carefully, including the legal pack, for this type of information.

How to improve your chances of being approved for a mortgage

When you’re using a mortgage to buy at auction, there’s little room for issues that may hold up the process. There are a few things you can do, though, to improve your chances of successfully securing a mortgage.

Have a good credit history

One of these is to have a good credit history, which shows the mortgage lender that you’re capable of managing your finances. This doesn’t mean that you won’t be approved for a mortgage if you have bad credit — we work closely with lenders specialising in bad credit mortgages so will approach the lender most suited to your situation if that’s the case. However, having a good credit rating mitigates the lender’s risk. Contact each of the UK’s main credit reference agencies – Equifax, Experian and TransUnion – to check your credit report. Each one collects different data on you so be sure to obtain a copy of your credit report from each one.

If your credit score can be improved, try to work on this before applying for a mortgage. There are various ways to do this:

• Register on the electoral roll
• Reduce your debts as much as possible
• Refrain from applying for any new lines of credit
• Pay your bills on time
• Remove any financial links on your credit report to others with a bad credit rating
• Control any unnecessary spending, such as cancelling membership fees for a service that you don’t use or closing home shopping accounts that you don’t need
• Refrain from getting into more debt, such as taking on a new loan to clear existing debts — this will harm your credit score rather than improving it

Get your finances in order

We mentioned trying to reduce your debts as much as possible above as well as controlling your spending. These will show the lender that you’re able to budget properly. You also need to ensure that you have an adequate deposit. As well as that, you need to make sure that you’ve budgeted for the mortgage-related costs, such as the lender’s fees, legal fees, insurance costs and stamp duty. Don’t worry if your income is irregular – for example, if you’re self-employed or a contractor. We’ll approach a lender who offers more flexibility with their affordability criteria in these circumstances.

Arrange your mortgage in principle

It’s essential to arrange a mortgage in principle before the auction. This gives you an idea of the amount that the lender is prepared to offer you as a loan, based on their affordability criteria and your proof of income. It also lets you know the budget that you need to stay within when bidding at the auction. Just be aware that a mortgage in principle isn’t the same as a mortgage offer. Even if you have a mortgage in principle, it doesn’t necessarily mean that the lender will agree to provide you with a loan for the property. Do your research on the property carefully to make sure that it meets the lender’s approval so that you don’t risk being denied a mortgage due to any issues.

Do your research

It’s essential to check that the property you’re buying meets the lender’s requirements. This means that it needs to be in a liveable condition, such as having a functioning kitchen, bathroom and heating system. If it’s a leasehold property, the lease needs to be a suitable length. If it’s too short, it’s unlikely that the lender will offer you a mortgage. Another reason for not being offered a mortgage is if there are issues with the property. For example, there may be subsidence, dry rot or the presence of Japanese knotweed, which is an invasive plant species that can cause a lot of damage to the property.

You don’t want to risk any nasty surprises once you’ve already won the auction bid. Not only will they be expensive to deal with but they may leave you without a mortgage offer. Therefore, it’s essential to do your research properly before bidding on a property. View the property you’re interested in first and check the legal pack, paying particular attention to the special conditions of sale. It’s also recommended to have a survey carried out before the auction to be certain that there are no unforeseen issues.

Considerations before buying a property at auction

There are some risks when it comes to buying at auction so you need to consider these carefully before proceeding. These include the short completion deadline, a mortgage refusal by the lender if the property doesn’t meet their requirements and the potential waste of time and money when doing your due diligence before the auction.

Quick deadline

The fast completion timescale, particularly with an unconditional auction sale, can be stressful when using a mortgage to finance your purchase. You need to pay your 10% deposit as soon as you’ve won the bid. The remainder of the purchase price needs to be paid shortly afterwards, such as in 28 days. If you don’t complete on time, you risk losing your deposit and the seller may make a claim against you for any losses incurred, which can be very costly.

That’s why our mortgage brokers select a specialist auction lender to handle your mortgage application. This ensures that your mortgage is processed as quickly as possible to meet the short completion deadline. If you’re concerned about any delays, you can always consider short-term finance and then refinance to your mortgage afterwards.

Mortgage refusal

Auctions are a great place to get a bargain property but you need to check that the one you want to bid on meets the lender’s requirements. Many properties listed for sale at auctions have issues and you won’t usually find these for sale via estate agents. These can be structural issues, legal problems, short leases or issues that make properties unmortgageable.

If the property you want to buy isn’t habitable, the lender won’t agree to a mortgage. In this instance, you can finance your auction purchase with a bridging loan and then switch to a mortgage once you’ve renovated the property to a habitable condition.

A surveyor will quickly notice any structural issues or those that make a property unmortgageable. For example, the presence of Japanese knotweed in the grounds, dry rot, rising damp or subsidence. If you’re relying on a mortgage to fund your auction purchase and don’t instruct a surveyor before the auction, you risk the lender refusing to offer you a mortgage if issues are detected after you’ve made a successful bid. At that point, you will already have entered a legally binding contract and have no legal recourse. You’ll need to find an alternative form of funding, such as a bridging loan, to complete your auction purchase.

A property with a short lease can also pose a problem as your lender may be reluctant to offer you a mortgage for this. If they do agree, they may insist that an arrangement is made for a lease extension. You may also be refused a mortgage if the property has a bad title or there are arrears on it. Once the hammer falls, you’re legally liable for these, which is why it’s essential to do your due diligence beforehand.

Wasted time and money

By doing your due diligence before the auction, you know exactly what you’re buying and the maximum amount you should go to when bidding. View the property before the auction so that you can check its design and condition as well as whether any remedial works are needed. If work is required, ask a builder to give you an estimate for the costs. Check that the property is in the right location, has suitable transportation links and is appropriate for your plans. Contact the local council to check if any projects are planned in the local area. Also, do your research on the prices that similar properties have sold for in the area. These are standard checks when buying any property but are time-consuming and can seem like a waste of time if you don’t make the winning bid.

A surveyor will highlight any major remedial works needed, structural damage or other potential issues that you may not be aware of. They will also flag up whether the property is unmortgageable or not. Having a survey done before the auction is important, therefore, as far as your mortgage is concerned as well as for your budgeting needs. If you don’t win the bid, however, you’ve lost the money you spent on having a survey carried out.

You should also ask your solicitor to check over the legal pack even if you’ve already checked it yourself. They will notice issues that you may not spot. Their findings will help you decide whether to proceed with bidding on the property or to adjust the amount you’d planned to bid for it. Just like paying for a survey, your solicitor has to be paid for their services regardless of whether you successfully bid on the property or not.

Secure a mortgage to buy at auction

Are you thinking about using a mortgage to buy at auction? Then get in touch with us as soon as possible so that we can find the best mortgage deal for your auction purchase. The earlier you can provide our auction finance experts with your information and details of the property you’re interested in, the sooner we can ensure that you have a mortgage in principle.

Generally, auction catalogues are released at least 4 weeks before the auction date. This is the best time to give us a call and get your mortgage plans in motion. Contact us on 01322 907 000 to get started. If you prefer, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. We’ll reply to you as quickly as possible with more information on how to proceed.

We can also arrange short-term finance for you to bridge the gap between buying the property and finalising your mortgage. That way, you don’t need to worry about the fast completion timescale, giving you peace of mind for your purchase. With a quick arrangement time and fast access to funds, there’s no need to miss out on a good opportunity. Short-term finance tends to be more expensive than a mortgage as you’re benefitting from the speed and flexibility it offers. Therefore, we recommend getting your mortgage application in as quickly as possible so that you can switch from your short-term loan to your mortgage sooner rather than later.