Purchasing property from auction can be a good idea, both for property developers and people looking for a new house. A wide array of properties can be found at auction, from habitable properties of all kinds to projects brimming with potential. Property auctions also tend to be much cheaper than buying from the open market, presenting opportunities for many a savvy property developer to pick up a cheap yet profitable project. That said, purchasing property is still a huge undertaking, even with the relatively low cost of those found at auction. To ensure a project is successful, property developers must secure a reliable line of finance first.

There is much debate over which form of finance is best for purchasing an auction property. Some will lean towards mortgages as a tried and tested method, while others will tout HELOCs as a good way to raise money quickly. However, while these certainly have their place, one form of finance can be indispensable for purchasing an auction property – bridging loans.

In this article, we will discuss bridging loans, break down what they are and how they work, and how they can help you purchase a property at auction. Let’s get started.

What is a bridging loan?

Bridging loans are a type of secured loan that specialise in providing flexible finance over a short period of time. You can expect your bridging loan term to be no more than 12 months, though the exact time will depend on your chosen lender. While this particularly short length might seem unintuitive at first, bridging loans are designed to “bridge” the gap between the purchase of an asset, and a long-term financial solution. It is important to keep in mind that bridging loans are not a means to an end in and of themselves.

As a form of secured loan, bridging loans require the borrower to use assets of similar value to the loan as collateral. These assets will have a lien placed against them by the lender, which legally entitles the lender to seize these assets if the borrower fails to keep up with repayments. This presents a risk for the borrower, but also allows bridging loans to sport a series of strong benefits, which we will cover later.

Can I use bridging loans to purchase an auction property?

In short, yes, it is entirely possible to use a bridging loan for auction property. In fact, bridging loans are an excellent tool for this purpose, and you will likely find they are one of the best options available to you. Bridging loans are made for scenarios exactly like this, where a borrower needs an injection of cash quickly, and extended delays could mean opportunity slips through the cracks. But why exactly are bridging loans so useful in this scenario?

Why would I use a bridging loan to buy an auction property?

Most forms of finance have their advantages and best use cases, so what makes bridging loans so special for funding purchases at property auctions? Well, the answer lies in their core advantages. These advantages are as follows:

  • Speed – Speed is the primary benefit offered by bridging loans. They offer incredibly fast access to finance, in large part due to the requirement of collateral assets. Bridging loan lenders place a large emphasis on the value of assets to be used as collateral, rather than on income, credit rating, and other such factors. This allows lenders to expedite the application process, resulting in a much faster release of funds. All in all, the application can be completed and funds released in as little as 48 hours.
  • Flexibility – The second benefit of bridging loans is almost equal to the first. Bridging loans offer an excellent degree of flexibility, in terms of what can be borrowed, how it can be repaid, and how the funds can be used. Provided you have assets of sufficient value, the sky’s the limit as far as the value of your loan goes. You’ll have some wiggle room over when you begin repayments, and how your interest payments will work. Some lenders will roll up the interest into the loan itself, while others will allow it to be paid at the end of the term. Lastly, bridging loans have a near-limitless series of applications, allowing you to seize any opportunity you spot.
  • Quick repayment – The short-term nature of bridging loans means that you’ll end up paying off your bridging loan fast. How you do this is up to you; many bridging loan borrowers will choose to sell off an asset to repay the loan in full, while others will refinance the loan with a mortgage or something similar. In any case, you won’t be burdened by your bridging loan for long.

While these benefits are useful for any application, they are especially valuable for purchasing auction property. Speed is vital to ensure you have your finance ready for auction day, flexibility allows you to raise the requisite amount of capital, and quickly repaying any loan is always nice. Although other forms of finance can be of use when buying auction property, these three benefits make bridging loans a near-unparalleled choice.

How to buy an auction property using a bridging loan

Using a bridging loan for auction property is quite simple, provided you adequately prepare before auction day. You should have a firm idea of what properties you intend to purchase, as you’ll need this information for your application. Once you have it, take this information to your chosen bridging loan lender and apply for a loan that matches your needs. Assuming your application is approved, all you need to do is wait for the funds to be released and look forward to auction day.

Once you’ve purchased your property, you’ll then need to focus on repayment. How you do this is up to you, but as we’ve mentioned, most borrowers make a full repayment through the sale of an asset or refinancing, though you may find other methods more appropriate. With the bridging loan repaid, you can enjoy your new property without worrying about bridging debt.

Wrapping up

All in all, bridging loans are an excellent way to finance the purchase of auction property. The benefits of this form of finance mean it is well-suited to this task, allowing borrowers to quickly react to opportunities as they appear. However, bridging loans do come with downsides, namely that borrowers must expose themselves to a level of risk that may not be comfortable. Borrowers in a rough financial position are especially vulnerable, as failing to keep up with repayments can mean losing important assets. If you are unsure whether bridging loans are right for you, be sure to contact a professional for financial advice before you take action.