For mortgage brokers, understanding the role of bridging finance in auction purchases is essential.
Traditional mortgages can take months to secure, while auction buyers must complete within 28 days. Bridging loans can provide the speed and flexibility needed to meet these tight deadlines. And we’ve come with receipts, such as one of the more intricate auction cases we worked on.
An experienced investor sought to purchase a run-down 1900s end-of-terrace cottage with a plan to refinance into a buy-to-let mortgage post-renovation. However, the property had a loft extension without planning permission, which could’ve caused valuation issues had it not been for our legal team that stepped right in for a swift solution.
The house was valued at £175,000, with a projected GDV of £250,000 after renovations. Within just two weeks, we secured a bridging loan of £120,400 (70% LTV) at 0.99% interest, so that our client could buy the property, while preserving personal funds for improvements.
Why Bridging Finance?
The loan was arranged quickly, ensuring the auction deadline was met.
Short-term funding provided time to renovate before refinancing.
The investor retained capital for renovations, maximising return on investment.
Key Risks and Considerations
Every case is different, but brokers should always consider the following when advising clients on bridging finance for auction purchases:
Exit Strategy Risks
Clients need a clear plan, which could be refinancing or selling. Market shifts, valuation discrepancies, or financing issues can impact their ability to repay the loan.
Property Condition and Legal Issues
Auction properties are often sold as seen, with little time for due diligence. Structural issues, planning restrictions, or legal complications can add unexpected costs and delay refinancing.
Cost Overruns and Budgeting
Renovation costs often exceed initial estimates. Clients should have a financial buffer to cover unforeseen expenses.
Lender Criteria and Loan Terms
Bridging loans carry higher interest rates and short repayment terms (between 3 months and 2 years). Not all lenders require basic credit checks and a viable exit like we do. Some may need personal guarantees or additional security.
Auction Timelines
With a 28-day completion period, clients need fast funding. Any delay in securing finance can result in losing the deposit or breaching the contract.
Market and Economic Conditions
Interest rate changes, economic downturns, or tax policies can affect property values and profitability.
How Can Brokers Help?
Ensure clients have a viable exit strategy and contingency plans.
Recommend thorough due diligence before bidding.
Work with reliable bridging lenders who can complete deals quickly.
Educate clients on potential risks and financial implications.
Bridging finance can be a powerful tool for auction buyers, but managing risks is key. Brokers who guide clients through the process effectively can help them secure opportunities, add value, and achieve strong returns.