Can I Get a Mortgage for an Auction Property?

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It can be difficult to get on the property ladder with rising housing prices and living costs. Most homebuyers opt for the open market, especially first-time buyers. However, auction properties offer an opportunity to purchase your dream property at a lower price, even with a mortgage. Fortunately, auction properties aren’t just for those with cash reserves. You can also use a mortgage to purchase them. However, there are some nuances and restrictions to keep in mind. If you’re considering buying an auction property, continue reading for the necessary information to prepare.

Can I Get a Mortgage for an Auction Property? – How?

  • You certainly can. When seeking to get a mortgage for an auction property, it’s important to remember that lenders only issue mortgages on mortgageable properties. You might need to look into alternate funding options, such as a business loan, depending on the severity of the property’s condition and your plans for repair. So, follow these instructions to get a mortgage for a house you bought at an auction:
  • You need first to get an “agreement in principle” or decision in principle from a mortgage provider in order to figure out how much you can borrow. This will additionally demonstrate your financial capability to get the home. Afterward, the lender will determine how much you can borrow based on your income and affordability.
  • It is necessary to make sure that you have a solid financial foundation and are able to give the lender the required financial documentation, such as your income information, three months’ worth of payslips and bank statements, a valid photo ID, and proof of your current address.
  • You can start browsing for auction properties once you have a decision in concept. You might want to take advantage of this time to view any properties you’re interested in since auction catalogues are typically accessible a few weeks before the auction.

Why Should I Get a Mortgage for an Auction Property? – Is it Worth Investing in?

Buying a property at auction also offers the opportunity to purchase a property at a potentially lower price than on the open market. Auction properties are often listed with a guide price, which can be significantly lower than the property’s market value. This can be particularly advantageous for investors looking to renovate and sell the property for a profit, or for those looking to purchase a home at a more affordable price.

Additionally, purchasing at auction could be a more efficient way to buy a home for people who are aware of the process and at ease with it. The auction process can be quicker and less stressful than utilizing an estate agent because it has a fixed timeframe, clear conditions, and deadlines. As a buyer, you have the option of a more efficient, transparent, and possibly less expensive way to buy real estate, but it’s important to do your homework and be aware of any risks.

How is Buying an Auction Property With a Mortgage Different From Buying on the Open Market?

If you intend to purchase a home at auction with a mortgage, it is essential to have a lender’s decision in principle before the auction. This might assist you in setting your maximum bid and show that you have the funds to purchase the property. The following are some additional ways that buying a house at an auction with a mortgage differs from doing so on the open market:

  • The process of buying a house at an auction is often quicker and easier than doing it on the open market, to start. There is a set completion date for properties that will be sold at auction, thus the sale will take place on that day. For purchasers who want to finalize deals quickly, this could be advantageous, but it can also be troublesome because it leaves little time for investigation.
  • Second, an auction property often requires a larger deposit than a home purchased on the open market. An auction property may require a deposit of up to 10% of the purchase price, which is a considerable sum of money.
  • Third, the sale’s conditions are typically not negotiable. Auction properties are sold as-is and on a completely non-negotiable basis, unlike buying a property on the open market where you might be allowed to negotiate the price or terms of the sale. This implies that before placing a bid, you must be certain that the property is a good fit for you.

As the mortgage process can take 2–6 weeks to organize, it is crucial to consider the effects before purchasing an auction property with a mortgage. Auction sales come in two types: unconditional and conditional.

Unconditional Auction Sale

If your bid is accepted for an unconditional sale, a 10% deposit is required upfront. The remaining balance, unless otherwise specified, must be paid within 20 days. This option is not recommended for those who require a mortgage, as the turnaround time is too short for lenders to arrange a mortgage deal. A bridge loan may be an option, but it has a significantly higher interest rate than a mortgage and should only be used as a short-term solution.

Conditional Auction Sale

A conditional auction sale is a better option for those looking to purchase an auction property with a mortgage. It provides an exclusivity period of 56 days to purchase the property, during which the seller cannot accept any other offer. This allows time for necessary survey work, securing the mortgage, and completing administrative work. If the sale is not completed within 56 days, the reservation fee may be lost.

The Mortgage Lender Can’t Meet the Given Deadline – What to Do Now?

If your mortgage lender is unable to meet the quick completion deadline required for an auction sale, you may need to consider taking out a short-term bridging loan to cover the costs until your mortgage is arranged. A bridging loan typically takes up to 10 days to complete, making it quicker to obtain in comparison to a mortgage. However, you should be aware that bridging loans come with higher interest rates, so you should aim to use them as a short-term option only.

When buying an auction property with a mortgage, the bidding process can be competitive. Your lender will only offer you a set amount based on the estimated value of the property. If the bidding goes beyond this amount and you are the highest bidder, you will be expected to pay the difference. This factor can affect your application, so make sure to budget accordingly, taking into account additional costs such as stamp duty, admin, and surveyor fees.

Can I Buy a Property to Renovate and Finance It With a Mortgage?

If you want to buy a property that needs significant renovation, it is unlikely that you will be able to finance it with a mortgage. In this case, the best option would be to either purchase the property with cash or take out a commercial loan specifically for renovation works. After the necessary repairs have been completed, the property will become habitable and mortgageable, allowing you to take out a mortgage on the property.

However, taking out a commercial loan for renovation works will come with a high-interest rate and should only be used as a short-term financing option. You will also need to budget carefully to ensure that you have sufficient funds to complete the renovation work before taking out a mortgage.

What Factors Make a Property Unmortgageable?

To be eligible for a mortgage, a property must meet certain requirements. If the property is too small, lacks basic amenities such as a bathroom or kitchen, or has issues like wet or dry. Additionally, if the leasehold is too short, lenders may not offer a mortgage. It’s important to ensure that the property is immediately liveable or lettable, either freehold or with a long leasehold, and has working heating, bathroom, and kitchen. Having a property survey done can help identify any potential repair costs before purchasing.

There are several factors that can make a property unmortgageable, which means that lenders are unwilling to offer a mortgage on the property due to certain risks involved. Some examples of factors that can make a property unmortgageable include:

  • Structural issues: Properties with significant structural issues such as subsidence, dampness, or significant cracks may be deemed unmortgageable. According to a survey by HBB Solutions, around 17% of homebuyers had pulled out of purchase due to structural issues.
  • Short leaseholds: Properties with short leaseholds (typically less than 70 years) can be difficult to secure a mortgage on, as lenders may be reluctant to lend on properties with less than 70 years remaining on the lease. A report by the Leasehold Advisory Service found that almost 2 million leasehold properties in England and Wales have less than 80 years remaining on their leases.
  • Environmental issues: Properties with environmental issues such as Japanese Knotweed or other invasive species, or those in high-risk flood zones, may be considered unmortgageable. A study by Environet UK found that one in five UK properties is at risk of being affected by Japanese Knotweed.
  • Non-standard construction: Properties that are constructed from non-standard materials or methods may be deemed unmortgageable, as they may be considered harder to maintain or repair. According to a report by RICS, about 5% of all UK properties are constructed from non-standard materials.

Conclusion

It is possible for buyers of real estate to purchase an auction property with a mortgage. However, in order to comprehend the variations in the purchasing process, research is essential. Before going to the auction, get a lender’s approval to make sure your finances are solid. Buying an auction property can take 2-6 weeks to arrange, and deposits are usually higher. If your lender can’t meet the deadline, consider a bridging loan. With proper preparation and knowledge, it can be a cost-effective way to purchase the property.

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