YES, you can get a Mortgage for a 56 Days Modern Method of Auction Property rather than getting Bridging Finance.
Lets look at why we now have the 56 Days Modern Method of Auction. Historically, auction purchases have provided 28 day deadline to Complete; in this article, I discuss a new popular, more modern method of selling at auction over a 56 day period which extra length attracts a wider pool of purchasers as it enables mortgages to be part of the process.
The good news is we are mortgage brokers and can arrange the finances. This article gives you an insight into the general workings of a 56 day auction mortgage. You must also engage with a Solicitor/Conveyancer to ensure you fully understand the transaction and process and adhere to the specific rules of the Auction House.
Background – Funding an Auction purchase
Auction purchases have always favoured “cash buyers”, isolating those who need to finance to make the purchase feasible. To fill the gap, bridging lenders’ developed loans, sometimes badged as “auction finance”, which provide a commitment to lend going into the Auction House, with high legal costs, sometimes using title and indemnity insurances to get the deal completed in the 28 days.
Mortgage Lenders generally step back from this space, which can lead to a large percentage of abortive work due to unsuccessful bids, reputation damage from failure to meet deadlines, and self-imposed set-up cost caps for the consumer, which put constraints on resources at the legal stage; preferring instead to engage with customers further down the line by offering remortgage solutions to clear the bridge once the pressure is off.
The other main concern of Mortgage Lenders was the quality of the underlying asset, as often auction finance was used to conceal all manner of ills, such as poor titles, undefined boundaries, environmental issues, defects in the property, etc.
56 Day Auction – a new Modern Method approach for Auction
Perhaps inspired by “eBay” or the general lean towards “doing everything online”, a new, more modern method of selling at auction over 56 days has evolved in recent years, which includes an extended 28 days for the exchange of contracts, thus allowing breathing space for mortgage applications to be approved.
The change to 56 day auction now attracts purchasers who can sit in the comfort of their own home, without fear of an intimidating auction atmosphere, and take part in a bid to buy a property using various “portals” in a matter of minutes. The time slot afforded also allows time to consider the asset rather than make a snap decision on the day, as the bidding duration typically provides a window of 30 days.
Broadly speaking, it has also increased the quality and quantity of the stock as the online functionality attracts more Sellers who seek “a quick and hassle-free way” to sell.
The disadvantage is that winning bidders are NOT legally committed to the purchase in the same way as the traditional auction sales. This is because an unconditional exchange of contracts does not always happen immediately. However, there are still significant financial penalties if a buyer pulls out of the deal due to the non-refundable reservation fee they pay.
How does the 56 Day Auction work?
The winning bidders pay a reservation fee of around 5% at the conclusion of the auction. They then have 28 days to exchange contracts on the property and a further 28 days to complete. The 5% reservation fee is on top of the purchase price and is liable to Stamp Duty. If the sale is not complete due to a fault or a change of heart from the vendor, then the reservation fee is refunded to the purchaser. However, the purchaser will lose their reservation should they be the ones who decide to pull out of the purchase.
Frequently Asked Questions
Q) What are the main advantages of using a mortgage for 56 day Modern Method Auction?
A) Mortgages generally have lower finance costs. And, if you plan to keep the property, it offers greater security as the finance is over many years, unlike a bridge, which is typically 3 to 24 months.
Q) Which Mortgage Lenders offer mortgages for 56 day auctions?
A) No Mortgage Lenders are against the concept; however, some are better placed to deliver than others on the timeframe due to their underwriting, service, valuation and legal processes
Q) Do Mortgage Lenders guarantee Completion in 56 days?
A) Sadly not. For a start they are relying on too many third parties to be responsive: you, the mortgage applicant, a surveyor, and solicitors, on top of their own service standards, new business flow and processing.
Q) What can I do to reduce the Mortgage Processing time?
A) Enlist the services of a professional Mortgage Broker, such as Niche Advice, who will help you collate and check documents before they are submitted to the Mortgage Lender. They should also be able to provide an insight into the current Mortgage Lenders service times and help you select the appropriate choice to improve your chances of meeting the 56 day auction purchase deadline.
Q) Does the state of the property matter when looking to buy at an Auction with a Mortgage?
A) Mortgage lenders will absolutely want the property to be habitable, i.e., water-tight, with a working kitchen and bathroom as a minimum. Putting cosmetic work in another way to modernise would be acceptable. It is not the right form of finance for significant works and re-configuring of the layout. In the case of a buy-to-let mortgage, the property must to be lettable from day 1.
Q) I’m looking to buy a property I’ve seen as a bargain in an auction and do it up.
A) If you are looking for the mortgage lender to factor in a future value after works have been carried out, this is not the vehicle for the uplift. This is because their Surveyor will purely value the property in its current state.
Q) Should I get my own valuation ahead of the auction?
A) The Auction pack should have a basic valuation included,; personally, I would always recommend a higher calibre of valuation; for more information on the subject https://www.nicheadvice.co.uk/home-buyer-survey-cost-and-why-get-a-valuation-report/
Q) Will the Mortgage Lender use the auction pack valuation or the one I’ve got myself?
A) No, they will carry out their own survey for mortgage purposes.
Q) Is it safer to get bridging finance for my auction property?
A) It depends, so it should be talked through with your Mortgage Broker. It can be easier and quicker.
Q) Are mortgages cheaper to buy auction properties with than bridging loans?
A) The rates and set-up costs on Mortgages are normally far cheaper. Also if the original plan was to buy the property on a bridge, keep it, and remortgage to a mortgage, then you are adding in an unnecessary layer of costs.
Q) If I buy at Auction, what reassurances about the property do I receive?
A) You will be provided with an “Auction Pack” which typically covers a Property valuation report (including guide and starting price); floor plans and pictures (like in an estate agent’s listing); Energy Performance Certificate (EPC); HM Land Registry documents – showing property title, boundaries/ extent of the land; Conveyancing Searches on the property and immediate area; lease, ground rent and service charge details (if applicable); inventory of fixtures and contents e.g. curtains, carpets light fittings and appliances, etc.;
Q) Why buy at an auction?
A) The properties are generally cheaper to reflect the desire for a quick sale. You have an Auction Pack, which gives you a clear understanding of what you are buying at the outset.
Q) Why is a 56 day auction better than a traditional one?
A) Double the time to complete. The exchange of contacts is 28 days rather than on the day of the auction. Convenient bidding, bid online at any time without attending the auction. The initial fee payable for a successful bid is typically 5% rather than 10%. Mortgages are more usable. Binds the vendor to the transaction, thus reducing the probability of being gazumped.
Q) Disadvantages of a Modern Method of Auction Purchase.
A) There are Auction fees to pay. The Stamp Duty calculation includes the reservation fee amount. You are committed to the purchase or lose the fee potentially more competition than buying locally from an estate agent. The final purchase price is not known until the auction closes. The timescale is inflexible so unlikely to be suitable for people in property chains.
Q) Are Mortgages always advisable on 56 day auction purchases?
A) No, auctions can attract sub-standard properties that are not suitable for a mortgage. This includes repossessions, renovation properties, uninhabitable premises and development opportunities.