Mortgage an Auction Property
Obtaining a Mortgage on an Auction Property requires Specialist Advice.
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Buying at Auction
More and more vendors are choosing to sell their homes at auction, which is naturally leading buyers to the auction house.
Traditionally however, buying at auction has been a cash buyers game.
And buying a property at auction with a Mortgage is risky.
When the gavel drops you will be required to put down a cash deposit or reservation which will be non refundable should you be unable to complete the purchase.
This is where the main risk lies if you plan to purchase an auction property using a Mortgage.
If your Mortgage Offer is withdrawn for any reason or your Conveyancer highlights something unnaceptable to you or your Mortgage Lender after the gavel drops, your initial deposit will be lost.
How do Property Auctions work?
Property Auctions usually come in two forms:
At a traditional auction when the gavel drops, who ever has the highest bid will need to Exchange Contracts and pay a deposit (usually 10% of the winning bid). Exchanging contracts makes the purchase legally binding on both parties.
You will then have 28 days in which to complete the outstanding legal work required and complete the purchase.
Modern Method of Auction:
Modern Method Auctions are usually conducted online and can run for a number of weeks, typically 4. Although they can be extended, to achieve a higher price for example. Or shortened if the price is achieved sooner than expected.
On the acceptance of a successful bid, you will be required to pay a non refundable 5% deposit. This will pay for the auctioneers fee, and will be in addition to your successful bid.
You will however be given longer to complete, 56 days in total. 28 days to exchange contracts and an additional 28 days in which to complete.
Benefits of buying at auction with a Mortgage
Bargain – The most obvious benefit of buying at auction is to bag a bargain. It is not unheard of, to pick up a property at 20-30% below the market value.
Certainty – when the gavel drops (providing the reserve price has been met), the property is yours. No risk of being gazumped or the seller changing their mind after months of patiently waiting to complete.
Speed – The biggest frustration of sellers and buyers alike, is the time it can take for a traditional house purchase to go through. Solicitors going back and forth, and often taking days to respond to an email can amount to many months of waiting. With Auction’s, this cannot happen as there are legal deadlines put in place.
Risks of buying at auction with a Mortgage
Cost – Most costs will be non refundable should you be unable to complete for any reason.
A bargain isn’t guaranteed – Getting a bargain isn’t always guaranteed. Auction properties often come with other fees and in many cases may be in a poor condition. This is where costs can end up exceeding what you expected.
Unmortgageable – Some Auction properties are unmortgageable, which is the reason why they have ended up at Auction. For example, the property may not be “immediately habitable”, a requirement most Mortgage Lenders have.
As Homes Under the Hammer have drilled into the nation; “always read the Legal Pack”. The Legal pack could evidence hidden costs or potential restrictions held over the property.
Can you get a Mortgage on an Auction Property?
It’s always advisable to secure the Mortgage for the maximum you’d be willing to pay for the property prior to the Auction.
This way you’ll have the means to pay for it, and give yourself the best chance at being able to complete the purchase within the auction deadline.
How to get a Mortgage for an Auction property?
Follow these 10 steps if you want to buy a property at auction with a Mortgage:
1. Choose a Mortgage Advisor – not just any Mortgage Advisor. One who has experience with dealing with Mortgages for Auction Properties. We can put you in touch with an advisor experienced within this area, if you don’t know where to start. Alternatively, contact local independent advisors and ask if they can help. You can do this by Googling “Mortgage Broker near me”, and remember to always read their reviews.
2. Speak to the agent advertising the property – Let them know you need to buy with a Mortgage, and ask if there are any problems with this. This will help identify unmortgageable properties.
3. Ask if the vendors would be willing to agree to a sale prior to it going to Auction. If not, tell them the maximum you would be willing to pay and ask for indication as to whether this figure would be acceptable to the sellers at Auction. This will help identify whether your offer is likely to beat any potential reserve prices. The guide prices are often considerably lower than what properties achieve at Auction, and are there just to tempt buyers in.
4. Ask the estate agent or auctioneer, can your Mortgage Lender have access to the property to complete a valuation? If not, unless the lender is able to complete an “automated valuation”, you will not be able to obtain a Mortgage on the property.
5. Instruct a Solicitor and check the Legal Pack with them – Find a solicitor who will commit to the deadline set by the Auctioneers. I.e. a 28 day turnaround, for Traditional Auctions.
6. Complete the Mortgage Application – instruct your Mortgage Advisor to complete your Application. They will present the application in the best way to the Lender, upload your documentation and instruct the valuation to be completed on the property.
7. Mortgage Offered – this is formal confirmation that the Mortgage Lender is happy to offer you a Mortgage.
8. Auction – that’s right, only at stage 8 do we actually get to the Auction house. Remember to stick to the maximum budget you set yourself pre auction. If you bid more than what the Mortgage Lender has valued the property at, you will need to pay the shortfall and make the Mortgage Lender aware.
9. Exchange Contract and instruct your Solicitor to complete the Legal Work – immediately after auction, you will be required to pay a deposit and exchange contracts making the purchase legally binding on you and the sale legally binding on the vendors.
10. Completion – Congratulations you can now collect the keys to your new home.
How much deposit do I need for an Auction Property?
Typically a traditional auction will require a 10% deposit to be paid immediately after the gavel drops. This will usually go toward the purchase of the property.
However, this can differ so it’s best to check the legal pack to make sure there aren’t any other immediate fees and to ensure the 10% goes toward the purchase.
Due to the above, the minimum deposit required to purchase an auction property is 10% for a residential purchase and 20-25% for a Buy to Let purchase.
Modern Method of Auction:
You will need 5% to pay for the cost of the auction. This won’t go toward your deposit.
In addition you will also need to contribute a minimum of 5% if you are buying a property to live in, or 20-25% if buying to rent.
Top 5 Mortgage Lenders for an Auction Property
The best Mortgage Lenders for an Auction property will be lenders who accept Auction properties (obvious – but not all do), generally have the quickest service times and will respond quickly to your Solicitors and escalate important cases to enable quicker completion.
Lloyds Banking Group – Lloyds/Halifax
Coventry Building Society
Skipton Building Society
Other Lenders are available.
Alternatives to Mortgaging an Auction Property
It will always be advisable to attempt to negotiate the purchase of an auction property prior to it going to auction. This won’t always be doable but will be worth trying.
Purchasing a property that’s not up for auction. Buying a property at auction can be costly and stressful when buying with a Mortgage. Traditionally they have been a cash buyers game, and for good reason.
What Mortgage Repayment options will I have?
A Capital & Interest Repayment: This is where you repay your Mortgage balance as well as the interest to the Mortgage Lender.
Providing you keep up with repayments you are guaranteed to have repaid your Mortgage by the end of the term.
The other usual option is Interest Only.
Interest Only: Available usually with Buy to Let purchases and some Residential Mortgages. This is where you just pay the interest to your Mortgage Lender each month.
Meaning at the end of the term, your full Mortgage balance will still need to be repaid.
What types of Mortgages will be available?
The main types of Mortgages that will be available will be:
Fixed Rate Mortgage: Simply put, this is where your Mortgage is fixed for a certain period of time, usually for 2 to 5 years.
The rate is best to be thought as fixed for you and the Lender.
As during this time your interest rate is guaranteed not to change. And you are unable to leave the Mortgage early without paying a fee to the lender for doing so.
Variable Rate Mortgages: Where your interest rate can vary. You will usually have a set interest rate which can fluctuate throughout the term.
The interest rate will usually change in line with the Bank of England base rate, although it doesn’t have to.
Tracker Mortgages: Where your interest rate will track a certain index, usually the Bank of England Base rate.
When the Base rate changes, so will your Mortgage rate.
What documentation will I need to provide the Mortgage Lenders?
What documentation is required for the Mortgage, will vary between Lenders.
Mortgage Lenders will usually need to verify your identity, as well as your income and outgoings.
To do this they will require the following:
Payslips for Employed Applicants or Accounts/Tax Calculations and corresponding Tax Year Overviews for any Self Employed Earnings.
Up to 3 Months Bank Statements to evidence Deposit, Earnings and Outgoings.
Identification to prove your Name and Address.
What costs will I need to consider?
Auctioneers costs: This will typically be 5% of the winning bid, but does vary between auctions. Always read the legal pack as this will identify any surprise fees or costs.
Lenders Arrangement/Product fees: A fee the lender will charge for arranging your Mortgage.
In general, the higher the Arrangement fee the lower, the Interest rate.
Most, if not all lenders, will also provide a low/no fee option and charge a slightly higher rate as a result. These fees tend to be between 0-£999.
Broker fees: this will depend on how complex your case is. For example, whether you have any adverse credit.
To find out exactly what it could cost, get in touch with on of our Mortgage Brokers for a free non-obligatory quotation.
Solicitors fees: for an ordinary house purchase, you can expect to pay anywhere between £1,000 and £2,000, so its important to shop around.
Always check out their Reviews before choosing a Solicitor. They’re a very important cog in the house buying process.
Stamp Duty: If you are a first time buyer in England, it is unlikely you will pay stamp duty if your property is valued less than £500,000.
For non first time buyers, Stamp duty will be due on properties worth over £125,000.
Mortgage Valuation: The Mortgage Lender may charge a fee to complete a basic valuation on your property during the application process.
This will be between 0-£250. But could be more if you need to use a specialist lender, if you have adverse credit for example.
Survey fees: You may choose to carry out a more thorough assessment on your property.
The most common, being a Homebuyers report, which will cost between £300-£500.
Full Structural report, if needed, will cost in excess of £600, however these are rarely necessary.
Compare Mortgages for an Auction Property
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