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Mortgages for Buying at Auction

Katie Cullen
Written by Katie Cullen
11th January 2017 (Last updated on Monday 13th November 2017)

Getting a mortgage for buying at auction works in the same way as if you were buying through the more traditional route.

Contact a mortgage provider – either in branch or through a mortgage broker – and let them know your situation. Your provider or broker will have dealt with a similar situation before, and will know how best to help you.

If you find yourself stuck or don’t think you will be able to get the money within that period, you may want to consider a bridge loan until your mortgage clears. However, bridge loans pose a much higher interest amount and must not be used for the long-term.

This article will cover the following points

What is Different? Mortgage in Principle for Auctions Properties to Avoid Bridge Loans

What is Different?

Buying at auction with a mortgage means you need to be confident that you can obtain the full amount of finance by the end of the 28-day payment period.

As soon as the gavel drops, 10% of the purchase price needs to be paid on the day. You will also need to show evidence that you will be able to pay the rest of the amount within 28 days. One of the main deterrents of buying at auction is the timescale you need to pay by.

If you fail to pay the full amount within 28 days of the auction, you will lose your deposit and could be liable to pay for the resale of the property at a proceeding auction.

You may also have to pay interest for everyday until the property is sold and might even have to pay the difference if the property finally sells for less than you initially bid.

Mortgage in Principle for Auctions

A Mortgage in Principle is the certificate or statement from a lender to say they would be willing to lend you a certain amount of money in principle.

The amount is based upon your financial background, including information obtained from your credit score.

All mortgage lenders provide a Mortgage in Principle (MIP), otherwise known as an Agreement in Principle or Decision in Principle. Having an MIP is not only vital for buying at auction, it is reassuring as a buyer to know how much you can theoretically afford.

You will need an MIP certificate or statement available on the day of the auction as proof that you will be able to afford your purchased property.

It is important to understand that a Mortgage in Principle does not provide a guaranteed amount. Mortgage providers withhold the right to pull out of the lending process at any time under certain circumstances, leaving you with a huge problem.

Lenders will likely pull out of an auction sale if the property you have purchased does not meet their criteria.

Properties to Avoid

Remember, most auction properties will need some sort of development. Common properties to be found at auction are:

  • Repossessed and sold by a lender
  • Those whose owner has died and is being sold by relatives or a lender
  • Currently tenanted
  • Dilapidated
  • Unmortgageable for some reason

While the first three types of property will generally be fine with mortgage providers, you may have trouble with dilapidated properties. This is due to the amount of money you may have to spend redeveloping the site back into a liveable state.

As the name suggests, you will obviously have trouble gaining a mortgage for unmortgageable properties.

A property could be unmortgageable for any number of reasons. For example, lenders would be reluctant to lend on a flat with a very short leasehold.

Likewise, your mortgage will not be approved if your purchased property is of an unusual structure, such as concrete.

You will also not be able to borrow if the property you purchased has subsidence or if the conveyancer finds evidence of Japanese knotweed.

Auctioneers will often release their property catalogue at least four weeks before the day of the auction. In this time, you should start to prepare your mortgage, but also view properties that you are interested in.

You can take out a survey before purchasing if you are unsure of any issues, such as subsidence and knotweed.

However, you will be left financially in the red if any issues are found after the gavel drops.

Bridge Loans

You may be interested in taking out a bridge loan if your mortgage loan will not be fulfilled by the end of the 28-day payment period.

A bridge loan offers a short-term lending solution when buying a property before longer-term borrowing has cleared.

Please note, bridge loans should only be used as a last resort due to high interest. The average bridge loan will generally ask for 1.5% interest per month, which translates at around 18% APR.