Can I get a mortgage for an auction property?

Can I get a mortgage for an auction property?
28th July 2022

This is one of the most frequently asked questions about property auctions and is the element which often leads to the most confusion from buyers. Our head of auctions, Daniel Gale, explains when you can and can’t use a mortgage to finance your auction property purchase.

“Yes, you absolutely can get a mortgage on SOME auction properties, but not all of them. As a general rule of thumb, mortgage lenders will only lend against a property that is in an immediately habitable or lettable condition.”

A clear example of when a mortgage would be successful is when purchasing an auction property that has a working kitchen, bathroom, and an adequate heating system. A property that doesn’t have a working bathroom inside a home would only be suitable for cash buyers.

When buying a property through the traditional method of sale, an offer is made but money doesn’t change hands immediately – this differs when buying a property at auction. On the day of the auction, in order to secure the property the winning bidder must pay a 10% deposit. This must be done on the day of the auction, so you need instant access to the funds.

The other key difference in the financial details of purchasing a property at auction is that the full amount of the property must be paid within 28 days of the sale being agreed. Failing to do so may lead to not only you losing the property, but potentially the deposit paid as well.

Unless you are a cash buyer, you will need to have a mortgage in principle in place before attending the auction. To secure a mortgage in principle, you will also need to have a mortgage valuation to ascertain the value of the property. You must also ensure that the mortgage lender you select is able to work to the 28 days completion deadline. Our partner Mortgage Scout can help advise.

Mortgage lenders will only lend you the amount the property has been valued at, not what you paid for it. It’s important to remember that if you bid higher than expected, you understand that it could compromise your mortgage application - setting and sticking to a realistic budget is key.

When working out the budget and applying for a mortgage, you must also take into account the cost of surveys, legal advice, and of course stamp duty.

What if your lender can’t work to the 28 day completion time?

If you are worried about getting the finances secured in time, taking out a bridging loan may help tide you over until the mortgage has been agreed. A bridging loan normally takes about 10 days to arrange so is much quicker than a typical residential mortgage. Although bridging loans are a quick solution, the interest rates on them are often much higher than a traditional mortgage so please ensure you can afford the repayments on them before relying on this to finance your purchase.

What if you are buying a property for renovation?

Typically lenders will not offer a mortgage on properties which are not in an immediately habitable and/or lettable condition. This is when investors will either fund the purchase with cash or take out a commercial loan, this provides buyers with the funds to purchase and renovate the property. Once the condition has been improved, a regular mortgage can be applied for or, in some cases, this can be arranged in advance and the bridging loan switched into a long term mortgage.

If you would like to learn more about buying a property through auction, please contact the First For Auctions team.

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