Buying a property at auction is an opportunity that may now present itself too often – offering the chance to secure real estate at a competitive price, bypass long sales chains, and complete transactions much faster than through traditional routes. However, with auction purchases, speed is everything. Once the hammer falls, buyers are typically required to pay a 10% deposit immediately and complete the purchase within 28 days. This tight deadline often makes typical financing routes difficult to use or simply unworkable.
That’s where bridging loans are the answer. Used specifically for short-term use, bridging finance can be the perfect solution for buyers who need to capitalise on deals yet don’t yet have long-term funding in place. Below, we explore the various merits to obtaining a bridging loan for auction purchases.
Speed of funding
The biggest advantage of a bridging loan is speed. Traditional mortgage applications are drawn out and often result in a very slow process, involving credit checks, valuations, and detailed underwriting. In contrast, bridging lenders are built to move quickly. Many can issue an agreement in principle within a few days and likewise, after approval, the deposit of the funds in a matter of days straight into your bank.
This key advantage is what makes these facilities ideal for auction buyers who need move and progress things within a strict timeframe. Knowing that funds are speedy to obtain allows them to submit a bid with optimism in the knowledge that financing it won’t hold up completion.
Flexibility in property type or condition
Auction listings can include homes or commercial units that wouldn’t qualify for a standard finance route like a mortgage, it could be a property in need of refurbishment without a kitchen or bathroom, or buildings that may be classed as “uninhabitable.” Traditional lenders typically won’t finance such properties.
Bridging lenders, however, are far more flexible. They base their decisions primarily on the property’s value and how the borrower intends to pay back the money they have been lent, rather than the state and condition of the property in question. This means you can use a bridging loan to buy a property that needs renovation, complete the work, and then refinance with a standard mortgage or sell at a profit.
Chain-free transactions
Because bridging loans provide a fast and convenient way to get the money the borrower requires, they allow a faster purchase route, operating independently of property chains. You don’t have to wait for your current home to sell before making your next purchase. Instead, you can use a bridging loan to complete the auction deal and repay it once your sale goes through.
This can work in your favour as it will likely make you a more attractive buyer to the auction holder –sellers through auction listings value certainty and speed of completion above all else.
Tailored and short-term
Bridging facility are designed to be temporary only – meaning you would generally only need the finance for a number of months up to a year at maximum scale. This short-term ability is particularly attractive for auction buyers who plan to either refinance or sell quickly after winning the bid.
Most bridging lenders work with your to find a package that best suits your circumstances, including rolled-up or retained interest options, meaning you won’t need to make monthly payments during the time your hold the facility. It can help to ease cash flow pressures while you focus on renovations or securing long-term finance.
Unlocking investment opportunities
Finally, bridging loans can open doors to investment possibilities which otherwise may be out of your budget or personal capacity to even entertain. Auctions often feature repossessions, probate sales, and often has these listed at below-market prices. Having fast access to bridging finance allows you the opportunity to make a sizeable return on your outlay by even selling the property on, or doing it up and flipping it to increase its market price further.
Summary
For property portfolio builders, a bridging loan offers the speed, flexibility, and certainty that is needed to act promptly in a fast-paced manner when attending auctions. While it’s advised to have a route planned for how you plan to make your repayment, or having a predefined exit plan in place, bridging finance can be a powerful tool – turning time-sensitive purchases into sizeable profits in the not too distant future.