Can I Use Bridging Finance to Buy My Auction Property?

Buying a property at auction is a fast process, one minute you are thinking about owning your dream property and the next minute the hammer has gone down and it's yours.

Bridging finance could be one way to help you come up with the finances for your auction property, but there are also risks with this type of loan, so there are a few safeguards you need to have in place.

These few questions should help you decide whether a bridging loan is right for you.

1) Have You Applied For A Mortgage?

• A) Yes, I have applied and had my offer accepted in principle but it is taking a long-time to complete and I need to pay for the property within 14 days
• B) I have applied for a mortgage but I'm waiting to hear the outcome
• C) I have applied and been turned down for a mortgage

2) Do You Have Any Assets?

• A) I am in the middle of selling a property
• B) I have a home which I am not selling
• C) I have no assets

3) Do You Have A Get Out Clause

• A) I plan to pay the bridging loan back by selling my current property
• B) I have applied for a another loan but I am waiting for the funds to come through
• C) I have no means at the moment of paying the bridging loan back

4) How Long Do You Need To Borrow The Money For?

• A) Only For Seven Days
• B) A couple of months
• C) Indefinitely

5) What Kind Of Property Are You Buying?

• A) An investment property
• B) I am a first-time buyer
• C) I haven¹t seen the property but a friend bought it on my behalf at an auction

Mostly A- You Could Bridge The Gap

It sounds like a bridging loan could be the key to you securing your auction property. Be careful though, taking out a bridging loan is all about risk. A lender will supply you with the funds quickly and easily, but it will come at a premium.

There are typically two types of bridging loans, a closed bridge, where you give the lender a date when you can pay off the funds, for example three months, or an open bridge where you don¹t have a final payment date. The latter is typically more expensive as the lender is taking on more risk.

From your answers it sounds like you are well equipped to pay back a bridging loan if you were to apply for one. If you have a property to sell and this is guaranteed to go through you should be able to pay back the loan. But if you think for any reason you cannot pay back the loan quickly you should look at other ways to finance your property.

Mostly B - Tread Carefully

A bridging loan could be for you, but it sounds like you should weigh up the risk and be 100% sure that you can refinance out of the deal and pay back the loan should you need to.

Ideally it would be better if you could look at other forms of finance to pay for the deposit or property.

If you are waiting for a property to sell before you can pay the loan back you should be weary not to borrow more money than the property you are selling is worth, or you could end up being caught out.

If you have agreed to pay the money back in a set timeframe and you don't the lender could decide to take your other property into possession.

Mostly C - Bridging Finance Is Not for You

You should not be considering bridging finance at the moment.

If you have already applied to a mortgage lender or a loan company about obtaining the funds and they have said no, this should raise alarm bells. It might seem like a good idea to borrow the money in order to buy the property, but if you have no way to pay the money back the bridging lender will end up repossessing your property and you will be left with nothing.

Applying for a bridging loan with no get out clause is very expensive and you could end up getting into serious financial trouble if you keep the interest continually rolling on. Bridging loans should be treated as lending of last resort and definitely not as a long-term loan.

When attending a property auction it might be tempting to apply for a bridging loan there and then, but this is foolish. Bridging loans are a great solution for people who need funds fast but have security in place, if you don't they are best avoided.