Auction finance is a type of short-term funding designed to help buyers complete property purchases at auction. Due to the rapid nature of auctions—typically requiring a purchase to be completed within 28 days—auction finance, also known as bridging finance, provides a quick and reliable funding solution. This form of finance is ideal for buyers who need immediate access to funds but may not have all the capital available at the time of bidding.
How Does Auction Finance Work?
Auction finance is designed specifically to support the unique timeline and conditions of property auctions. Here’s an overview of how the process works:
- Preparation: Before bidding, prospective buyers can arrange auction finance in principle. This pre-approval helps them set a clear budget, as they’ll know how much funding they have available and what types of properties are eligible for financing.
- Deposit Payment: Once the auction hammer falls, the buyer is typically required to pay a 10% deposit on the property’s purchase price. Auction finance can include provisions to cover this deposit if needed, as well as other auction-related fees.
- Quick Completion: Given that most auctions require the transaction to be finalised within 28 days, auction finance lenders are prepared to complete due diligence and approve funds quickly—sometimes within 24 hours. This rapid turnaround ensures the buyer can meet the tight deadlines associated with auctions.
- Repayment: Auction finance is short-term, usually available for up to 12 months. Buyers often plan to refinance the property with a traditional mortgage, sell it for profit, or switch to a longer-term financing option to settle the loan.
How to Secure Auction Finance for a Property
The process for securing auction finance can be broken down into a few key steps:
- Research and Planning: Prior to attending an auction, research different finance providers to find the right fit. Evaluate the interest rates, fees, and loan-to-value (LTV) ratios to get a sense of your financial range.
- Obtain Pre-Approval: Getting finance pre-approved helps you set a realistic bidding limit. Lenders can usually give an indicative offer based on your financial profile and the types of properties you’re considering.
- Choose Your Target Properties: With auction finance arranged, you can choose your target properties and have the confidence to bid within your means.
- Complete the Transaction: After winning a bid, you’ll need to finalise the loan with your lender. The funds are released quickly to complete the purchase within the auction’s required timeframe.
Benefits of Using Auction Finance
Auction finance offers several advantages for both seasoned investors and new buyers alike:
- Speed: Standard mortgage processes don’t meet auction timelines, but auction finance lenders specialise in quick completions, ensuring buyers don’t miss out on opportunities.
- Access to High-Value Properties: For properties with high initial costs, such as commercial spaces or multi-unit residential properties, auction finance can help secure funding to cover significant investments.
- Flexible Usage: Auction finance isn’t limited to residential properties; it can be used for various types, including commercial, semi-commercial, land, and even untraditional buildings that may be harder to finance through standard mortgages.
- Cost-Effective Investment: Properties at auction often sell below market value, making them appealing for those looking to renovate and resell or add to a rental portfolio. With auction finance, buyers can leverage these cost-effective opportunities without having to wait for standard financing approval.
Is Auction Finance Right for You?
Auction finance may be ideal if you’re seeking to buy a property quickly, your working capital is tied up, or you’re planning to expand a property portfolio. However, consider the following before opting for auction finance:
- Eligibility: Most businesses and individuals with reliable credit can qualify, but your lender will evaluate credit scores, financial history, and possibly even your personal credit.
- Repayment Strategy: Because auction finance is short-term, you’ll need a clear plan for repaying the loan. Many buyers plan to refinance the property or resell it before the loan term ends.
- Higher Interest Rates: Auction finance typically has higher interest rates compared to standard mortgages due to the short-term nature and fast approval process. Evaluate the total cost of the loan to ensure it aligns with your financial goals.
Risks and Considerations
Buying at auction is inherently fast-paced and can involve risks, including:
- Limited Due Diligence: Properties at auction are often sold with limited time for inspection and due diligence. Buyers may not have all the information they would in a traditional sale, so it’s essential to conduct as much research as possible beforehand.
- Completion Deadlines: Auction sales have strict timelines, usually requiring completion within 28 days. Failure to meet this deadline can result in financial penalties or even losing the deposit. Ensure your finance is ready to prevent delays.
Is Auction Finance the Right Choice for Your Next Property Purchase?
Auction finance can be an excellent tool for buyers needing rapid funding solutions. With benefits like quick access to funds, flexible loan terms, and suitability for various property types, it enables buyers to capitalise on auction opportunities effectively. Ensure you have a repayment plan, and consider the risks involved in buying at auction to make informed, profitable investments.