3 myths around using bridging finance at auction debunked

Auctions have long been a great source of investment properties for experienced professionals. But the market, worth three billion pounds in 2015, has traditionally been dominated by cash buyers. With only 20% of auction properties purchased using finance, the appeal of extra liquidity clearly isn’t proving strong enough for many investors, who would otherwise be happy to use finance. So what’s stopping you from using auction finance?

The tight deadline might not be met

With 28 days to complete on an auction purchase, the risk of losing your 10% deposit is a logical concern. However, bridging loans are designed to be quick. The timeframe, in the context of a bridging loan, is comfortable.

Every lender that bills themselves as having expertise for auction purchases will, in principle, be able to meet your deadline. The majority typically complete loans in two weeks and can be flexible if there are tighter deadlines to work to.

Of course the speed of service does come at a premium and bridging loans are typically more expensive than a loans provided by high-street lenders. So cost may be another concern.

The cost of auction finance is too high

Whilst a bridging loan will always be more expensive than its longer term, longer wait, counterparts, they are deemed a useful financial tool by many professionals. In recent years, growing competition in the market has seen interest rates fall and many lenders remove early repayment and exit fees.

The advantage of a bridging loan at auction is twofold.

Firstly, it gives you the opportunity to secure funding within a tight deadline, before selling or refinancing the security.

Secondly, it frees up your liquidity, affording the opportunity to spread your investment over multiple projects.

Aside from the actual cost of funding, the value to the individual will ultimately depend on the strength of your strategy. Bridging finance, as the name suggest, is ideal for securing a property until long term finance can be arranged, or the underlying security is sold. Your ability to plan and deliver a project in a timely manner could be the difference between a profitable project or a loss.

You can’t be certain you’ll obtain funding

It’s understandable that certainty of funding might deter you from bidding at auction. However, you needn’t enter the auction blind. A simple bit of preparation before the auction will give you a good idea about what you can borrow on the properties you are looking to secure. The majority of specialist lenders will able to give you an offer in principle within 24 hours of an enquiry. Although terms may change slightly, depending on the outcome of the auction.

In order to receive an offer in principle you will need to provide the following information:

• The lot you will be bidding on
• The max bid you would be willing to make
• Your plans for the property
• Your proposed exit strategy