It is not an exaggeration to say that every day we are asked the question “can you arrange a buy to let mortgage for me on an auction property I am interested in purchasing”. My next question is when and the answer normally ranges from next day to next week.
If you are not a cash purchaser of residential auction property you need to be prepared to put down a deposit of at least 35-50% and budget for 10% of the purchase cost over 6 months in Bridging Finance costs. However, the most cost effective solution is to try and put yourself into the position of being a cash buyer
It is technically possible to purchase auction property with a buy to let mortgage, but the costs and risks are too high for anything other than a minute percentage to actually complete.
Without the cash in hand you must make sure you have an offer letter in place from a lender before you risk winning the bid, paying 10% deposit and potentially being sued if you can’t complete.
In practical terms that means you would need to:
- Apply for a decision in principle from a buy to let lender on a specific purchase price (as yet still unknown) – normally 24 hours
- Pay for a Valuation survey to be carried out by the lender – allow at least 5 days
- There could be other lenders booking or admin charges to pay at this stage that are non refundable.
- Complete a full application form providing proof of ID, Address and any other documents required.
- Await an offer letter for the exact amount you require – 2 to 4 weeks
Even after this an offer letter can be withdrawn by a lender at any time up to the date of completion (this can and does happen) and if the loan amount changes it is reviewed again as a new application and could be declined.
As you can see from the above list this is not a practical way of purchasing auction property.
The best alternative is to look at your existing portfolio to see if there is the opportunity to release enough equity to effectively put yourself in the position of being a cash purchaser. You should allow at least 2 months for a remortgage to complete releasing these funds, but you then have the ability to wait for the best deal to come along without the same level of pressure at the sales.
There is one exception, which I have mentioned before if you carry out significant refurbishments, but normally once a property is purchased you will not be able to remortgage and release the equity until you have owned it for 6 months.
If you do go to auction you can gain commercial or bridging finance on nearly all auction property if you can put down a big enough deposit and are prepared to cover the costs including interest for 6 months until it can be refinanced onto a buy to let mortgage.
Auctions can be a fantastic way to purchase excellent investment property, but rarely mix with buy to let mortgages.
One of the most common forms of loan we have assisted clients with in the past when purchasing at auction is development finance, but that is really another article in its own right.
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