What is auction finance, and how does it work?

Buying a property at auction can be a great way to secure a good deal. However, it’s a fast-moving process, and you need to have the necessary finances in place quickly to complete your purchase. That’s where auction finance comes in.

Auction finance is a specialised form of short-term funding designed to help buyers complete on auction properties quickly. In this blog, we’ll explain what auction finance is, how it works, and why it might be the right option for you.

Why property auctions are different

Purchasing property at an auction differs from buying through the open market. When the hammer falls, you enter into a legally binding contract to buy the property. At that moment, you must:

• Pay a deposit, usually 10% of the purchase price.
• Complete the purchase, typically within 28 days (sometimes even less).

This short timeframe can be challenging if you lack the funds to pay for the property outright. Traditional mortgages often take weeks or even months to arrange. Additionally, lenders may be cautious about certain types of properties, such as those requiring significant renovation or lacking a kitchen or bathroom.

Auction finance aims to bridge this gap, providing you with quick access to the funds needed to meet the auction house’s deadlines.

What is auction finance?

Auction finance is a form of bridging loan. It’s a short-term loan that gives you the funds to purchase a property at auction when you don’t have the cash available upfront.

The features of auction finance include:

• Speed – funds can often be arranged within days rather than weeks.
• Short-term nature – loans are typically for 6–12 months, giving you time to refinance or sell the property.
• Flexibility – lenders are typically less concerned about the property’s condition, allowing for the financing of projects that wouldn’t qualify for a standard mortgage.

These features make auction finance a popular choice for investors, developers, and small businesses seeking to start or expand their property portfolios.

How does auction finance work?

The process of securing auction finance usually follows these steps:

1. Preparation before the auction

Before bidding, it’s crucial to secure an agreement in principle from a lender or broker. This agreement provides confidence that funding will be available if you win. You should also conduct due diligence on the property, reviewing the legal pack, surveying the property if possible, and determining your maximum bid.

2. Winning the bid

Once the hammer falls and you’re the winning bidder, you’ll immediately pay the deposit and sign the contract. At this stage, you commit to completing the purchase within the auction house’s deadline.

3. Arranging the finance

With the agreement in principle already in place, the auction finance application is finalised. Lenders will usually require a valuation of the property and some basic information about your exit strategy – how you plan to repay the loan, either through refinancing, sale, or rental income.

4. Completion

The funds are released, enabling you to complete on the property within the strict deadline. Without auction finance, this would often be impossible with a standard mortgage.

Exit strategies for auction finance

Because auction finance is short-term, lenders want to know how you intend to repay it. Common exit strategies include:

• Refinancing – switching to a longer-term mortgage after the property is habitable or renovated.
• Sale of the property – selling the property after increasing its value through refurbishment or development.
• Business cash flow – utilising profits or other income streams to repay the loan.

Having a clear and realistic exit strategy is critical to securing auction finance.

Benefits of using auction finance

Auction finance offers several advantages:

• Speed of access – essential to meet auction deadlines.
• Flexibility – available on properties that wouldn’t qualify for a mortgage.
• Opportunity – allows buyers to take advantage of auction bargains or properties with potential.
• Leverage – enables investors to use finance rather than tying up all their cash.

For many small businesses and property investors, these benefits outweigh the often higher interest rates compared to traditional mortgages.

Things to consider

While auction finance can be a powerful tool, it’s important to consider:

• Costs – interest rates and fees are typically higher than with a standard mortgage.
• Short-term nature – you’ll need a clear exit plan to repay the loan.
• Risk – if you can’t refinance or sell the property as planned, you could face financial difficulties.

Working with an experienced finance broker can help you navigate these challenges and structure the right solution for your circumstances.

How ASC can help

At ASC, we’ve been assisting small businesses and investors in securing funding for over 50 years. We understand the pressures of time and the complexities involved in auction finance, and we work with a broad network of lenders to find the right solution swiftly.

We focus on keeping the process simple, so you can bid confidently and complete without stress. Whether you’re a first-time auction buyer or an experienced investor, we’ll help you arrange finance tailored to your goals and exit strategy. With the right support, you’ll be ready to seize opportunities and turn them into profitable investments.