Auction finance: funding a property bought at auction

Auction finance is short-term lending, secured on the property you are buying, that pays for a lot at auction and is repaid when you sell it or refinance onto longer-term borrowing. In practice it is almost always a form of bridging loan.

The British Business Bank describes business bridging loans as a short-term financial solution that bridges a gap in a business’s finances rather than a permanent one. That fits auctions well: the completion deadline arrives before a long-term mortgage could be arranged, so a short loan covers the gap.

Timing matters because a successful bid commonly creates a binding contract on the day, so you need the money lined up before you raise your hand. In England and Wales, the usual rule that a land contract must be in signed writing does not apply to a contract made in the course of a public auction, under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.

The auction’s own conditions of sale then set out the deposit and the completion date. We do not quote typical figures here because they differ between auction houses and lots, so read the legal pack for each lot. It will tell you what you pay on the day and by when you must complete.

Auction finance works by agreeing the loan in principle before the sale, bidding within your limit, then completing the loan and the purchase within the deadline. The order matters, because most of the work happens before the hammer falls.

Lenders look at the property that secures the loan, how you will repay it and the borrower’s position. Because the property is the security, its value and condition carry a lot of weight.

• The property: its value, condition, legal title and whether it can be mortgaged. Some lots need work before a mortgage lender will lend.
• The exit: how the loan ends. The British Business Bank notes that a business may need a plan for further financing when a bridging loan period ends, and a sale or refinance is the usual answer.
• The borrower: your finances and track record. A lender may run credit checks, and a full application can involve a hard search. See our guide to soft and hard credit checks.
• The amount: the loan is a share of the property’s value. Our guide to loan to value explains that ratio.

If your credit history is imperfect, see our overview of business loans with bad credit. Options can be narrower and the cost higher, subject to status and lender criteria.

Auction finance costs interest plus fees, and the total depends on the lender, the property and your plan to repay. We do not quote rates because they change and vary by deal. Compare offers on total cost, not just the interest figure.

• Interest, which may be paid monthly or rolled up and paid at the end. The British Business Bank notes the total plus interest is paid at the end of the loan period, although some providers take monthly interest-only payments.
• Arrangement and valuation fees, and the lender’s legal costs.
• Your own solicitor’s fees and the auction house’s fees.
• Exit or redemption fees, and the cost of extending if completion of your sale or refinance runs late.

Read how to compare lender offers before you accept one.

You pay Stamp Duty Land Tax on a property bought in England or Northern Ireland above the threshold, and you must send the return and pay within 14 days of completion. Capzy does not give tax advice, so confirm your position with an accountant.

GOV.UK says you usually pay 5% on top of the residential rates if you own another residential property. Scotland and Wales have their own taxes. Our guide to stamp duty on commercial property covers the non-residential bands.

Auction finance can be regulated or unregulated, depending on who borrows and what the property is for. A regulated mortgage contract is one secured on land where at least 40% is used, or intended to be used, as or in connection with a dwelling by the borrower or a related person.

Loans to a company, and loans to individuals for investment property, are usually outside that definition. Under the FCA’s glossary, a regulated bridging loan is a regulated mortgage contract with a term of twelve months or less. If you plan to live in the property, tell the lender and take legal advice, because the rules change.

The main risks are being bound to a purchase before you have checked everything and being unable to repay when the loan ends. A bridging loan is short, so a slow sale or a refused refinance can leave you paying more for longer.

• The property is not mortgageable, so the exit refinance fails.
• A defect or restriction in the legal pack is missed, because the contract binds you at the hammer.
• Works cost more or take longer than planned.
• A personal guarantee or additional security from directors puts more than the property at risk. Read about personal guarantees before you sign.

If you are buying through a company, other routes may suit a longer hold. See our guides to buy-to-let through a limited company and commercial mortgages for the refinance side.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce borrowers to lenders that offer bridging finance, grouped in our bridging lender directory. Auction deadlines are tight, so start the conversation before the sale, not after it.

You can check your funding options with a soft search that does not affect your credit score. A full application may involve a hard search, and any offer is subject to status and lender criteria. We do not give legal or tax advice, so use a solicitor for the legal pack and an accountant for the tax.