Buying a house at auction can be an exhilarating experience, especially for those looking to find unique properties or, secure a good investment quickly. However, financing such a purchase through a mortgage can introduce various complexities and may be a limiting factor in the ability to successfully bid on a single property at auction.
Understanding the factors at play when buying a house at auction as well as the potential pitfalls trying to secure a mortgage on a property up for auction, are crucial if one is to bid successfully. Below we look at the implications of buying a house at auction with a mortgage, and how to improve the chances of a successful bid.
How A Mortgage Works On A Property Under Auction
When purchasing a property at auction with a mortgage, one of the primary challenges is dealing with lender restrictions to acquire a mortgage. Mortgage lenders are cautious about financing properties bought at auction, especially if those properties require significant renovations or are being auctioned in poor condition due to perceived higher risk potential for hidden defects and unexpected costs.
Additionally, it’s important to understand the various types of mortgages available and how they may apply to auction properties. Residential mortgages may not always be the best fit for bidding on a property at auction, due to the time constraints involved with applications being processed and adjustable rates that may cause payments on the property to increase with rising interest rates. As such, the bidder may be placed in a precarious position financially if they don't have access to more funds.
With a complex market presenting so many scenarios, agreements, rates, and values, it is wise to engage the services of a mortgage broker that specialises in auction-related mortgages. Using a broker’s services will incur additional costs, potentially up to 5% of the mortgage amount, but it may well be necessary to work with them due to their knowledge of the market, and ability to source an appropriate agreement for the bidder based on their financial position.
Securing Financing Before the Auction
Securing your mortgage to fund your bidding ahead of the auction can significantly influence your chances of a successful purchase. Before attending the auction, it is best to obtain an Agreement in Principle (AIP), from your lender. This document outlines how much you can borrow based on your financial situation and can serve as proof of your ability to finance your bid.
Having an AIP not only increases your credibility as a buyer, but also, provides you with a clearer understanding of your budget and will influence what properties you bid on, and how high you might go about with your bids. Be mindful that some lenders may impose strict timelines for completing the sale, with many typically requiring to close the purchase of the property within 28 days of the auction, a much shorter window than on the commercial housing market.
This short timeframe can create pressure for prospective bidders, particularly if any delays occur in securing a mortgage approval or if additional documentation is needed to prove the bidder’s financial stability. Gathering all paperwork in advance and ensuring that your finances are in order well before the auction date is a great way to mitigate any issues.
It would be wise to consider consulting with a solicitor to review the auction contract and any legal documents associated with the property. Understanding the terms and conditions laid out in these documents can help you avoid pitfalls with securing your mortgage agreement from your chosen lender, as well as avoiding any surprises in completing the purchase of the property at auction.
Bidding At Auction With A Mortgage
Once you've secured your mortgage it’s time to consider the actual bidding process. Buying at auction with a mortgage may seem off-putting for some bidders if they find themselves in an awkward position due to the limited financial flexibility they have. However, even cash buyers have budgets they must stick to, so there is no reason to rule out bidding at auction with a mortgage, as long as bidders don’t go over budget.
With proper research and strategic bidding, you may find an excellent opportunity to acquire a home for less than you budgeted for. Additionally, the auction process is fast-paced, allowing for the property to change hands within a few weeks of the auction date compared to months of conveyancing and other litigation via traditional methods.
However, there are other potential hurdles to consider. Bidding wars can quickly escalate prices beyond your budget, especially for more desirable properties. It’s easy to get caught up in the excitement of a bidding war, leading to overbidding. This could very easily price you out of the auction if you're bidding with a pre-approved mortgage and do not have any additional funds to cover a higher bid.
But a buyer with a mortgage that is waiting to be approved can still come up with the winning bid by simply bidding high enough for the property, as only the deposit needs to be paid for the property on the day to secure it, providing they have that money to hand on the day. However, this may be a risky tactic, as the quick turnaround between auctions and the sale of a property, may cause buyers to lose out if their mortgage isn’t approved in time. This will also cost the buyer their deposit, as these are non-refundable for most transactions.
Tips For Bidding At Auction With A Mortgage
Do Your Research: Look extensively into the mortgage market, the terms you may be subject to, and of course, the auction process and the properties you are interested in.
Seek Professional Guidance: Engage with experts such as mortgage advisors and solicitors who are experienced in both mortgages and purchasing property at auction.
Understand the Costs: In addition to the purchase price and the cost of your mortgage, budget for additional costs such as stamp duty, legal fees, and any other related expenses after you complete the purchase.
Bid Calmly: The auction process can be very exciting, but it’s important to stay focused Stick to your budget and don’t let the excitement of bidding sway your decision-making.
Buying a house at auction with a mortgage can be a rewarding experience if approached correctly. By understanding the limitations and practicalities involved, you can increase your chances of making a successful bid and subsequently purchasing the desired property.
