Financing auction property

Categories: Case study | hmo | bridging loans

Summary of the case

• Auction purchase of an HMO property
• Auction reserve price was not met, so ended up being partially private sale
• High loan to value required

What we achieved for the client

• Found a lender who accepted that the client had no HMO experience
• Maximised borrowing with serviced interest payment terms
• Completion timeframe met

Property auction finance

The client in this case approached us a couple of days ahead of a property auction, to say they might be purchasing a property. The property was an HMO (house of multiple occupancy) premises.

On the day of the sale the reserve price was not met during the bidding. After the sale had ended, our client approached the vendor (the person selling the property) to agree a purchase price.

As with all property auction purchases, and despite not buying the property from under the hammer as such, the auctioneer fees and a deposit were immediately payable.

However, a longer completion timeframe was available than usual auction completion timeframes.

Getting an HMO mortgage without HMO experience

Whilst the client in this case was already a landlord, they did not have experience managing HMO property.

Given that HMO properties are more complicated to manage than a standard buy to let property, some lenders will only accept those people who have experience in managing them.

Other lenders are prepared to take on applications where there is landlording experience, but not in HMO property and a few lenders will accept applications from someone who is a brand new landlord.

Maximising borrowing on a bridging loan – serviced versus rolled-up interest

To achieve the maximum amount possible on a bridging loan, you can opt to pay “serviced” interest, rather than “rolled-up” interest, below explains how this achieves a greater loan amount:

• With rolled-up interest, the total monthly interest costs, for the term, are deducted from the requested loan amount (along with any product fees). This has an impact on the net loan offered, requiring the applicant to put down a greater deposit.
• With serviced interest, you pay off the interest charged for borrowing the money on a monthly basis, this does not have an impact on the net loan and so the overall borrowing is greater than a like for like ‘rolled-up’ interest bridging loan.

Outcome for the client

We achieved a number of things for the client.

First, we arranged their bridging loan and raised 75% of the property value for them. We maximised the borrowing they achieved by finding a product offering serviced interest terms.

Second, we ensured the bridging lender accepted applicants buying HMO property who did not have HMO experience.

Third, we got the deal completed within the timeframe set by the vendor and auctioneer, by chasing the vendor’s team to push the deal through.

Fourth, we arranged the exit finance for the client by securing an HMO mortgage with a lender, again who accepted applicants with no HMO experience, and completed a 75% loan to value fixed rate deal.

Should you buy a house at auction with a mortgage?

We do not recommend getting a mortgage for auction property. This is because, for a purchase, the turnaround time to completion is typically 8-12 weeks. An auctioneer will usually require payment within 28 days of the hammer falling, so you would not get the money in time with a mortgage.

Missing an auctioneer’s payment date is very costly. You would normally lose your deposit, which can be around 10% of the property price, the auctioneer’s fees and you may even have to cover the cost of the property being auctioned again.

Bridging loans for auction property

Our recommended method for financing auction property is a bridging loan. When you use a bridging loan for auction property there are a number of advantages:

1. The property does not need to be habitable: You cannot get a mortgage on a property that is deemed uninhabitable, which typically means there is not be a functioning bathroom or kitchen (or both). With a bridging loan you can borrow against an uninhabitable property.
2. You can fund works on the property: With a bridging loan you can not only buy at auction, but you can also cover the cost of work needed to the property, either because it is uninhabitable or needs general light refurbishment.
3. You can get the money quickly: A bridging loan can pay out much more quickly than a mortgage, within the 28 days of the auctioneer’s requirements, and Commercial Trust has even paid out a bridging loan in 5 working days.

There are also disadvantages to bridging loans, so using them requires careful planning:

1. They are more expensive than a mortgage: Interest is calculated monthly, rather than annually as with a mortgage, which is why they cost more.
2. The maximum term is shorter: Bridging loans are intended to be for short-term borrowing, you can typically take one out over a maximum of 24 months
3. You must have a firm plan to pay it off: Given a bridging loan is expensive, it is vital to know how you will pay it off, which could be with longer-term finance, or by selling the property.

Paying off a bridging loan with a buy to let mortgage

The client’s objective for the property was to let it out as an HMO, which it was already set up for. This meant that the client needed to arrange the “exit” – i.e. the method of paying off the bridging loan. In this instance, the exit was intended to be an HMO mortgage.

Typically, exit finance would be arranged at the same time as the bridging loan, but, at the time the bridging finance was being arranged, rates were changing quickly and were coming down after a spike in rates driven by changes in the economy.

So, we waited until the bridging loan completed to take advantage of more preferential HMO mortgage rates becoming available.

Day 1 remortgage, buy to let

When you secure a mortgage for auction property, either to recoup a cash purchase or to pay off a bridging loan, you will need to find a lender who does not require you to have owned the property for a long time.

A “day one remortgage” product refers to the terms of deals where the lender is flexible on ownership and will literally let you remortgage on day one of buying the property.

The mortgage we secured for our client offered exactly this sort of flexibility.