Can You Mortgage An Auction Property?

You may have noticed that, in recent years, more properties have been hitting the auction market. This is in part thanks to the easy and hassle-free way of selling that auctions provide. Whether it’s homeowners looking to sell and move elsewhere, those who’ve inherited a property they wish to sell, or businesses and investors in the process of refining their portfolios, there are plenty of people choosing the auction method. Naturally, this has also caused more buyers to turn to auctions, whether that be in the hopes of finding a better deal or as a direct impact of more sellers choosing to sell this way.  
 
Of course, for many people, buying a house outright in cash is not an option, which begs the question: can you get a mortgage on an auction property? The short answer to this question is yes, you can mortgage an auction property. However, this financing option does come with some caveats and nuances that you need to know about. Keep reading as we discuss the process of securing a mortgage deal on your auction property. 

Is Your Property Mortgageable? 

• The first, and arguably most important, caveat to know about is that not all properties are mortgageable. Auctions feature a wide range of properties, from ready to move into family homes to renovation projects, and not all of these will be considered as mortgageable in the eyes of lenders. Rather, there are some criteria that, if they aren’t met, means a lender simply won’t be able to give you a loan. This is up to the discretion of the lender, but it’s safe to assume that, if your chosen property meets any of the following criteria, you’ll be refused a mortgage:  
   
  There is no working bathroom or kitchen
• The property has wet or dry rot  
• The property has Japanese Knotweed or other invasive species  
• The property has any kind of significant structural defect or issue  
• The property is close to mining areas, landfills, or is at risk of flooding  
• It is a leasehold property where the remaining lease is too short (i.e., less than 70 years)  
• It is, in whole or in part, considered to be a derelict property
• The property is of non-standard construction. 
   

A good rule to abide by when looking at potential purchases is to make sure that the property is both immediately liveable or lettable, and is either freehold or has a long leasehold. It is also recommended that you have the property surveyed before bidding, as these will highlight any issues that could potentially render a property unmortgageable, and give your lender added security that their investment is a sound one. You also need to check with lenders directly if you are planning to buy a property with a sitting tenant. 

Mortgaging a property with a sitting tenant… 

Another, slightly more complicated criteria for getting a mortgage on an auction property depends on whether there is currently a tenant in situ. How you approach getting a mortgage on such a property will depend on your position as a buyer too, so we’ve broken down our advice for homebuyers and investors below. 
 
.…as a homebuyer 
 
For owner-occupiers, lenders may refuse you if there is a tenant in situ in the property if you intend to live in it yourself. This is because you won’t be able to use a regular residential mortgage if there are tenants in place at the time of purchase. Instead, lenders expect the property to be vacant so you can start living there upon sale completion, and having tenants would breach the conditions of the residential mortgage.  
 
This being said, lenders may agree to a residential mortgage if there is evidence to show that the tenants are to move out by the time of purchase, but this is at their discretion.  

… as an investor 

For landlords looking for a buy-to-let investment, pursuing a property with sitting tenants doesn’t exclude you from taking out a mortgage, you just need to get the right one. Buy-to-let mortgages are quite common among landlords and investors, and lenders are typically okay with this type of arrangement. They will want to see a valid Assured Shorthold Tenancy (AST) agreement, typically no longer than 12 months, and they will also check that the rental income covers the mortgage according to their internal rental stress test. 
 
Even as an investor, however, you’re still not guaranteed a mortgage on a tenanted property. It's important to note that some lenders may be cautious if the tenants have older or non-standard tenancy types, and that this could limit your mortgage options. If no lender is confident in the investment, you may be refused, meaning only cash buyers can proceed.  
 
Additionally, if you plan to make this home into your main residence later on, you will need to remortgage after the tenants have vacated to ensure you have the correct type of loan. 

Can I Get a Mortgage to Buy a Renovation Property? 

You can buy a renovation property with a mortgage, so long as it is currently liveable and has a working bathroom and kitchen. If your renovation property doesn’t meet living standards, or has significant structural defects, a lender won’t give you a mortgage.  
 
If you have your mind set on a particular property that isn’t eligible for a mortgage, your best option is to buy it with cash, or to take out a commercial loan to complete the repair works and cover the upfront costs. Once the property is deemed habitable, you can then take out a mortgage against it if you wish, but you will still need to budget accordingly to finance the project in those early stages, as commercial and bridging loans will have high interest rates and are only a suitable option in the short-term.  

How to Buy a House By Auction with a Mortgage 

We’ve established now that buying a property by auction with a mortgage is entirely possible, but it doesn’t work in quite the same way as it does when you purchase a home through an estate agent, for example. The reason for this is because auctions happen within a set time period which is much quicker than an open market sale, and the full amount for the sale must be paid within this time. The time it takes to complete the sale after the auction is dependent on whether you have an unconditional or conditional sale.  
 
If you are purchasing at auction with a mortgage, we’d always recommend doing so under a conditional sale, because the completion time is longer than an unconditional sale. Under conditional sales you’ll be granted an exclusivity period of 60 days to purchase the property, unless otherwise stated in the legal pack.  
 
During this 60 day-period, the seller cannot accept another offer, giving you the extra time you need to secure your mortgage from your lender.  
 
We don’t typically recommend purchasing with a mortgage if the sale is unconditional, but this is not because it can’t be done, rather that it will be a very tight turnaround that may subject you to penalties and fees if you can’t meet the deadline. This type of sale is better suited to cash buyers, as you’ll need to pay a 10% deposit immediately and the remaining balance will need to be paid within 28 days, where typically it takes 2-6 weeks for a mortgage to be arranged. However, as we’ll get into, mortgaging an unconditional sale property is still possible if you use other short-term financing options to bridge the gap. 
 
You can read more about these types of sales to better understand how they work with our guide to conditional and unconditional auctions. 

What if I Can’t Get a Mortgage in Time? 

If your mortgage lender can’t release the necessary funds by the time you need them, don’t worry, there are other options to secure your sale. You can take out a short term bridging loan to cover the upfront costs until your mortgage is arranged.  

What is a bridging loan? 

A bridging loan is money lent by a bank to ‘bridge the gap’ between two transactions, typically the buying of one house and the selling of another, or between completing the purchase and a mortgage coming through.  
 
A bridging loan is a viable option when it comes to quick funding gap solutions because they only take up to 10 days to complete. However, they don’t constitute a mortgage replacement in the long-term because their high interest rates aren’t sustainable for more than a short while. As such, we’d only recommend this option if you have your heart set on a particular property and you’re in a financial position to take out a short-term loan with higher interest rates to cover the costs until your mortgage comes through. 

Is There an Alternative to Bridging Loans at Auction? 

Yes, bridging loans aren’t the only option if you can’t arrange your mortgage in time. We partner with Together Finance to offer another route. They specialise in mortgages and loans designed with property auctions in mind and they can help you to arrange short term finance if a bridging loan is not a viable option.  

Can the Lender Withdraw Their Offer? 

• 
  It is possible that the lender will refuse to honour the offer after the mortgage in principle is agreed, but it’s not likely. On the very rare occasion that this does happen, it is usually due to the lender finding that there is a problem with the property that they weren’t aware of, or if something comes up on a credit report. Buyers shouldn’t be too concerned, however, as it is quite rare for a lender to refuse the mortgage offer as they’re typically very thorough with their initial checks. If you are still concerned, though, you can seek out a specialist lender that has experience with property auctions for some added peace of mind. 
   
  Beyond issues with the property putting an offer at risk, it’s also important to remember that lenders will only give you the agreed amount. If the bidding on your chosen property goes beyond what the bank has prepared to offer you, you will be expected to pay the difference if you win. The bank will base their lending decision on the estimated value of the property according to their own surveys and report, not what the auction goers think it is worth, so you will need to take this into account when calculating your highest bid.  
   
  This can cause a deal to collapse, because if the property sells for more than their valuation, the loan-to-value (LTV) increases, which may breach their lending limit. In that case, they might reduce the amount they’re willing to lend or even withdraw the offer entirely if it no longer fits their risk profile. To illustrate this, here’s an example: 
   
  The lender values the property at £180,000.
• You win the auction with the highest bid of £200,000. 
• If you had applied for a 75% LTV mortgage, the lender would only lend £135,000 (75% of £180k), not £150,000 (75% of £200k). 
   

If that no longer works for you financially, the deal collapses. The best option in this case is to consider short-term funding if you can, to cover the shortfall between what the mortgage lender will offer and what the property sells for.  
 
If the sale falls through, since the auction sale is binding, you’d lose your deposit, and would be at risk of facing penalties and legal action.  

Find your Perfect Property with BTG Eddisons 

To get started with buying an auction property with a mortgage, you should browse the catalogues and upcoming lots to start financially planning for the property you’re interested in. Make sure you read the legal pack to understand the type of auction method and any other relevant information. Allow yourself time to view the properties in person and have a survey done, then you can contact the bank to start the ball rolling with securing a decision in principle from your lender. You will also need to make sure any other relevant finances are in place, and have a contingency plan if bidding goes higher than expected or if your lender cannot complete the offer in time.