Guide to mortgages for buying at auction
- Properties at auction might be repossessed, dilapidated or unusual, but you may still be able to get a mortgage for them
- You’ll usually need to complete within 28 days of the auction, so you should arrange your mortgage swiftly
- Beware of bidding on properties that will be unmortgageable, or you could lose your deposit if you’re the highest bidder and can’t complete in time
- Prepare thoroughly for the auction and consider viewings, legal checks and surveys before you bid
Property auctions are traditionally the domain of landlords and investors looking for cheap houses and flats that they can turn around quickly and rent or sell for profit.
Anyone can buy at a property auction, though, and it could be a way to find a bargain home.
But the buying process - and often the properties on offer - are not for the faint-hearted, especially if you need a mortgage to finance your purchase.
Why do properties end up at auction?
Houses and flats end up being auctioned for many reasons, but the overarching feature is that the sellers are looking for a fast turnaround.
Often the trade-off is that properties will sell for less than they would if marketed through estate agents.
Some common reasons properties end up at auction are:
- The property was repossessed and sold by a lender
- The owner died and the property is being sold by a lender or relatives
- The property has tenants
- The property is dilapidated
- The property is unmortgageable for some reason
Although the first two types don’t present any specific problems with getting a mortgage, the last three might make things very difficult indeed.
If you’re dependent on being able to get a mortgage to buy the property, you need to do your homework and do everything you can to make sure the house or flat you’re bidding on is a mortgageable prospect.
Types of property sold at auction and potential mortgage problems
Some types of properties that end up at auction can be somewhat difficult to mortgage.
Repossessions - ‘repo properties’ - generally shouldn’t be any harder to mortgage than other properties of the same type.
Repos are homes that have been seized by the lender because the owner failed to pay the mortgage. The lender then sells the property; they’re unlikely to have an emotional attachment to the house and may want to move it on quickly and cheaply.
Many repos actually get sold through estate agents before they make it to auction, but gazumping can be a problem in such cases as the lender has a duty to achieve the highest possible price for it. However, if you can buy at auction the deal’s done on the spot, eliminating the possibility of gazumping.
Bear in mind that repos might be poorly maintained - if the previous owner couldn’t afford the mortgage, the property might not be well cared for.
Property where the previous owner died
If a homeowner has died and the property is sold, it’s known as a probate sale.
These properties sometimes end up at auction because the relatives want to arrange a sale quickly and without dragging it out. As with repos, they can represent a bargain at auction with no particular challenges for getting a mortgage, but you still need to check for potential problems.
If the previous owner was elderly or unwell they may have struggled to maintain the property, so it might need a bit of updating, or even full modernisation. As with repos, problems with the house’s structure might be an issue when it comes to getting a mortgage.
Properties with tenants
If you want a residential mortgage, don’t consider a tenanted property at auction, no matter how much of a bargain it looks.
Dilapidated properties may or may not be mortgageable; it really depends on the level and type of damage
You can’t get a residential mortgage for a property with sitting tenants.
On the other hand, if you’re a landlord it’s possible to get a buy-to-let mortgage on this type of property, although not all lenders will allow it.
Speak to a mortgage adviser to help you find a lender that will accept these circumstances.
The other difficulty is that there may be a number of issues surrounding the tenancy contract and other paperwork, which you’ll need an experienced conveyancer to navigate. This might be extremely tricky within the timescales for buying at auction.
Finally, beware of homes with protected sitting tenants. Such houses have tenants who have a right to remain there for life, meaning that the property may well be unmortgageable.
Dilapidated properties are different from those that are merely tatty or dated - they may have, for example, no roof, damage to walls, broken windows, doors and floors, and the essential services may have been ripped out.
Dilapidated properties may or may not be mortgageable; it really depends on the level and type of damage. For example, most lenders won’t consider properties without a functional kitchen or bathroom.
You should carefully assess the level of dilapidation before the auction and speak to a mortgage adviser to see if the property will be an acceptable risk to lenders.
Be aware that even if you can get a mortgage, the lender may ‘retain’ part of the mortgage funds and only release them once the problems are rectified.
Some self-build mortgages might be an option for properties that need full renovation, conversion or rebuilding.
The property is unmortgageable
A property might look ok on the surface, but it could be unmortgageable for a less-than-obvious reason. Some examples are:
- A flat with a very short lease
- Unusual construction, such as concrete
- Japanese knotweed in the garden
If you’ve got your heart set on an auction property but it has issues like these, it’s worth speaking to a mortgage adviser to see if they can find a lender that will accept the property. But be aware of the potential for heartache further down the road when you come to insure, repair or sell the property.
That being said, for those in a position to invest mortgage-free, these properties can be a good prospect at auction. A common developer strategy is to buy cheap properties with problems that make them difficult or impossible to mortgage, then to rectify the issue before selling on the open market.
Auction purchase timescales
One of the chief deterrents to buying a property at auction with a mortgage is the timescale involved.
Did you know...?
- There's a tight deadline to complete the sale after an auction - usually 28 days or less
Once the gavel has fallen, you’ll normally have to put down a 10% deposit on the spot. Then there’s a time limit by which you have to complete the sale, generally 28 days.
That means you’ll have to be confident that you can complete your mortgage application, as well as all the conveyancing work, within this time.
Because of this, you’d be wise to make sure you have a decision in principle on a mortgage before the auction.
You might also want to speak to a mortgage adviser who can recommend lenders that will accept the type of property you want to buy and are able to progress applications quicker.
Similarly, choosing a conveyancer that specialises in progressing auction transactions quickly will give you a better chance of completing within the time limit. Be warned - if you don’t manage to complete within the deadline, you’ll lose the deposit you put down at the auction.
Preparing for a property auction
If you want to buy at auction - with a mortgage - the key to success is all in the preparation.
You might have a lone viewing as you would for non-auction properties, or the selling agent might arrange ‘bulk’ viewings where they open the house up to groups.
Normally you’d arrange your survey after having an offer accepted, but if you buy at auction you should arrange surveys before you bid. Of course, if you’re interested in several properties it might end up being quite expensive to have a survey done on each.
It’s still wise to get it done and to budget for this though, as it’ll reduce the chances of you inadvertently buying a property that proves nigh-on impossible to mortgage.
Just as with surveys, you’ll increase your chances of a sound purchase if you get your conveyancer or solicitor to examine potential legal issues or problems with the property’s title before the auction.
Again, although this could be expensive if you’re interested in several properties, not only will it reduce your chances of bidding on something problematic, it’ll also speed up the purchase post-auction.
If all else fails and you’re struggling to meet the completion deadline due to delays arranging a mortgage, a bridging loan could save you from losing your 10% deposit.
It could also help cover the shortfall if you’re buying at auction but haven’t yet sold your current home which you already have a mortgage on.
However, bridging loans can prove costly compared with a mortgage, particularly if it’ll be a while before you can repay, and they won’t be right for everyone’s circumstances.