Understanding the Cost of Bridging Finance When Buying at Auction

Buying a property at auction can be an exhilarating experience, offering the potential to snap up a bargain that you might not find through traditional means. However, one of the key challenges is the requirement for quick financing, as auction purchases typically require the full amount to be paid within 28 days of the hammer falling.

This is where bridging finance comes into play—a short-term loan designed to "bridge" the gap until longer-term financing can be secured or the property is sold on. But what does this convenience cost? Let’s delve into the details.

What is Bridging Finance?

Bridging finance is a type of short-term loan that’s typically used to cover gaps in financing, particularly in property transactions. It's especially popular in auction scenarios because it can be arranged quickly, often within a few days, ensuring you don’t miss out on your purchase.

Key Costs Associated with Bridging Finance

Interest Rates:

• Monthly Interest: Unlike traditional mortgages where interest is typically calculated annually, bridging finance interest is usually charged monthly. Rates can vary widely but typically range from 0.75% to 1.5% per month. While this might seem low at first glance, when annualised, it can equate to a significant percentage.
• Fixed vs. Variable: Some lenders offer fixed rates for the term of the loan, while others might have variable rates, which could change depending on market conditions.
  

Arrangement Fees:

• These are usually between 1% and 2% of the loan amount and are charged by the lender for setting up the loan. For example, on a £200,000 loan, you could expect to pay an arrangement fee of £2,000 to £4,000.

Exit Fees:

• Some lenders charge an exit fee when the loan is repaid, which can either be a fixed amount or a percentage of the loan. Not all bridging loans have exit fees, so it’s essential to clarify this with the lender.
  

Valuation Fees:

• Before a lender agrees to a bridging loan, they will usually require a valuation of the property to ensure it’s worth the amount you’re borrowing. This cost typically falls on the borrower and can range from a few hundred to a few thousand pounds, depending on the property’s value and location.
  

Legal Fees:

• You’ll need a solicitor to handle the legal side of the loan, and these fees can add up. Both your lender’s and your legal fees will need to be covered, which could be anywhere from £2000 to £4,000 or more.
  

Broker Fees:

• If you’re using a broker to find the best bridging finance deal, they may charge a fee, typically around 1% of the loan amount. However, some brokers might instead receive a commission from the lender.

  

The Real Cost of Bridging Finance

To illustrate, let’s consider a hypothetical scenario where you’re buying a property at auction for £360,000. You secure a bridging loan of £252,000 (70% loan to value).

Here’s a breakdown of potential costs:

• Monthly Interest (at 1%): £2,520 per month.
• Arrangement Fee (1.5%): £3,780.
• Valuation Fee: £1,000.
• Legal Fees: £1,500.
• Broker Fee (1%): £2,520.
  
  If the loan is repaid in 6 months (a common timeframe), the total interest paid would be £15,120, bringing the total cost of the bridging finance to around £23,920, excluding any potential exit fees.

Is Bridging Finance Worth It?

Bridging finance can be a lifesaver in auction scenarios, allowing you to secure a property quickly. However, it comes at a cost, and it's essential to factor these expenses into your overall budget when considering an auction purchase. The key is to have a clear exit strategy, whether that's refinancing with a traditional mortgage, selling the property, or another financial arrangement, to ensure the bridging loan is repaid as swiftly as possible.

While bridging finance can be more expensive than traditional loans, its speed and flexibility make it an invaluable tool for auction buyers. By understanding the costs involved, you can make informed decisions and avoid any financial surprises down the line.

If you’re considering buying at auction and think bridging finance might be necessary, it’s wise to speak with a mortgage broker who can help you navigate the complexities and find the best deal for your situation.

Ready to Secure Your Auction Purchase? Let Mortgage321 Help!

Buying a property at auction is exciting, but securing the right finance can be challenging. At Mortgage321, we specialise in bridging finance and have the expertise to help you navigate the complexities with ease. Whether you need fast funding or advice on the best options available, our team is here to support you every step of the way.

Don't let financing hold you back from your next great investment. Contact Mortgage321 today to discuss your bridging finance needs and let us help you turn your auction purchase into a success.

Call us now on 01255 440142, email or WhatsApp us to get started!