Auction Finance: What It Is, How It Works, and Why It Matters

Buying a property at auction is fast-paced, exciting, and often a little daunting – especially when it comes to arranging the funds.

Traditional mortgages simply can’t keep up with the tight deadlines set by auction houses, which is why auction bridging finance has become a crucial tool for both seasoned investors and first-time buyers looking to snap up a deal.

In this article, we’ll demystify auction bridging finance, explain how it works, outline its pros and cons, and walk you through the process of securing it.

What Is Auction Finance?

Auction bridging finance is a short-term loan designed specifically to help buyers complete property purchases at auction.

Unlike a standard mortgage, which can take weeks or even months to arrange, bridging finance can be set up quickly. Sometimes within a matter of days! The loan is typically secured against the property being purchased (and sometimes other assets) and is intended to “bridge the gap” until longer-term finance (such as a mortgage) can be arranged or the property is sold.

Why Is Auction Bridging Finance Needed?

Auction purchases move fast. Once the hammer falls, buyers are usually required to pay a 10% deposit immediately and complete the purchase. This means they must pay the remaining 90% within 28 days.

As standard mortgage applications rarely fit this timeline due to lengthy approval processes, surveys, and legal checks, bridging finance steps in to provide the necessary funds quickly so buyers don’t miss out on the opportunity or risk losing their deposit.

The Purpose of Auction Bridging Finance

The primary purpose of auction bridging finance is speed and flexibility. It’s designed to:

• Enable quick completion: Meet the strict 28-day (or sometimes shorter) deadline set by auction houses.
• Provide certainty: Give buyers the confidence to bid, knowing they have the funds in place.
• Allow for property improvements: Bridging loans can be used to buy properties that aren’t mortgageable in their current state (e.g., those needing refurbishment), with the intention of refinancing or selling once works are complete.
• Support chain-free purchases: Bridging finance is ideal for buyers who need to act before selling another property.

How Does Auction Bridging Finance Work?

At its core, bridging finance is a secured loan. The lender agrees to provide the required funds, secured against the property (and sometimes additional assets) for a short period, usually 3 to 12 months. During this time, the borrower either sells the property, completes renovations and refinances onto a standard mortgage, or sells another asset to repay the loan.

Interest is typically charged monthly, and borrowers can often “roll up” the interest meaning it’s added to the loan and paid at the end rather than monthly. Some lenders also charge arrangement fees, exit fees, and valuation costs, so it’s important to factor these into your calculations.

The Pros of Auction Bridging Finance

Auction bridging finance offers several key benefits:

1. Speed:
Funds can be arranged in days not weeks, which can be crucial for auction purchases.

2. Flexibility:
Bridging finance can be used for a wide range of properties, including those that may not qualify for a standard mortgage (such as properties without a working kitchen or bathroom).

3. Certainty:
With an agreement in principle before the auction, buyers can bid confidently, knowing their finance is ready.

4. Opportunity:
Bridging loans can help buyers snap up bargains or unique properties that might otherwise be out of reach.

5. No monthly repayments (in some cases):
Interest can often be rolled up and paid at the end of the term, easing cash flow during the bridging period.

The Cons of Auction Bridging Finance

While bridging finance is a powerful tool, it’s not without its drawbacks:

1. Higher costs:
Interest rates and fees are generally higher than those for standard mortgages. It’s a short-term solution so you pay for the speed and flexibility.

2. Short repayment period:
Borrowers typically have 3 to 12 months to repay the loan, so a clear exit strategy is essential.

3. Risk of repossession:
As with any secured loan, failure to repay on time can result in the lender repossessing the property.

4. Complexity:
Bridging finance can be more complicated than traditional mortgages, with more paperwork and legal requirements.

5. Not suitable for everyone:
Bridging loans are best suited to buyers who have a clear plan for repaying the loan, whether through sale, refinancing, or another source.

The Process of Obtaining Auction Bridging Finance Through an Expert Broker

Arranging auction bridging finance may sound daunting, but working with an experienced property finance broker can make the process smooth and efficient. Here’s how it works with Exe Mortgages:

1. Initial Consultation

The process starts with a conversation. A member of our team will discuss your circumstances, the property you’re interested in, your intended use (e.g., refurbishment, resale, or letting), and your exit strategy for repaying the loan.

2. Agreement in Principle

Once your broker understands your needs, they’ll approach suitable lenders to secure an agreement in principle (AIP). This is a conditional offer that gives you confidence to bid at auction, knowing a lender is prepared to fund your purchase subject to final checks.

3. Property Valuation

After a successful bid, the lender will arrange a valuation of the property to confirm its market value and suitability as security for the loan.

4. Legal Work

Bridging loans require swift legal work. Your broker will work closely with solicitors to ensure all documentation is prepared and reviewed quickly, and that any legal issues are resolved without delay.

5. Formal Offer and Completion

Once the valuation and legal work are complete, the lender will issue a formal loan offer. Funds are then released (often within days) so you can complete your auction purchase within the required deadline.

6. Repayment

After completion, you’ll have a set period (usually up to 12 months) to repay the loan. Most borrowers repay via refinancing onto a traditional mortgage, selling the property, or selling another asset.

Why Use Exe Mortgages?

The bridging finance market is diverse, with lenders offering different rates, terms, and criteria. At Exe Mortgages our team will:

• Save you time: We know the market and can quickly identify suitable lenders.
• Get you the best deal: We have access to specialist lenders and exclusive rates not always available to the public.
• Handle the paperwork: We’ll manage the process from start to finish, reducing stress and avoiding delays.
• Provide expert advice: We can help you understand your options, the risks involved, and ensure you have a clear exit strategy.

Securing Auction Bridging Finance

Auction bridging finance can be a game-changer for property buyers looking to move quickly to seize opportunities at auction. Whilst it comes with higher costs and risks than traditional mortgages, its speed and flexibility make it the ideal solution for many buyers. With the support of an experienced property finance broker, the process can be straightforward and stress-free.

If you’re considering buying at auction and want to explore your finance options, reach out to our team early. With the right guidance, you can bid with confidence and turn auction opportunities into successful investments.