Property auctions. The very words conjure images of fast-paced bidding, snatched deals, and the thrill of securing a property at a potentially below-market value. For ambitious property developers and savvy investors, auctions represent a treasure trove of opportunity. But there’s a catch: the speed.
Unlike traditional property purchases, auction sales come with stringent deadlines. You often have just 28 days – sometimes even less – to complete the purchase after the hammer falls. This lightning-fast turnaround often leaves traditional lenders, like high-street banks, struggling to keep up.
So, how do you seize these fleeting opportunities and ensure you don’t miss out on your next lucrative project? The answer, for many experienced and aspiring property professionals alike, lies in a powerful and often overlooked financial tool: the second charge bridging loan.
Why Traditional Financing Falls Short at Auction
Let’s be clear: a standard mortgage or even a traditional development loan from a bank simply isn’t built for the pace of an auction.
- Slow Approval Processes: Banks have extensive due diligence processes, committee approvals, and multiple layers of paperwork that can take weeks, if not months, to finalise. This simply doesn’t align with a 28-day completion window.
- Property Condition: Auction properties are often sold “as seen.” This can mean anything from minor cosmetic issues to properties requiring significant structural work, or even properties with unique lease arrangements that make them unsuitable for standard mortgage lending until improvements or legal clarifications are made.
- Lack of Flexibility: Traditional lenders are typically rigid in their criteria. If you need to raise funds quickly against existing property equity to secure an auction purchase, their timelines and strict requirements can be a major hurdle, often requiring extensive valuations and legal processes that bridge lenders can fast-track.
Enter the Second Charge Bridging Loan: Your Auction Advantage
This is where second charge bridging loans truly shine, offering a tailored solution for the unique demands of auction property purchases.
A second charge bridging loan is a short-term, secured loan taken out against the equity in an existing property you own, in addition to any existing mortgage. Think of it as unlocking dormant capital quickly, without disturbing your current mortgage or going through a lengthy refinance. It sits “behind” your existing mortgage, taking a secondary position in terms of security.
Here’s why it’s the ideal fit for auction buyers:
- Unmatched Speed: Unlike traditional lenders, specialist bridging loan providers operate with incredible efficiency. Applications can be processed, and funds released within days, often within a week or two. This speed is absolutely critical for meeting those tight auction deadlines.
- Access Existing Equity: You can leverage the equity in your current residential or investment properties without having to sell them or undergo a time-consuming remortgage process. This provides the immediate capital needed to secure your auction purchase.
- Flexibility for “Unmortgageable” Properties: Many auction properties are sold because they are not immediately suitable for a standard mortgage (e.g., they lack a kitchen, have structural issues, or are commercial units). A second charge bridging loan can provide the funds to acquire the property and then undertake the necessary works, making it mortgageable or ready for resale.
- Preserve Your Existing Mortgage Rates: If you have a favourable interest rate on your current mortgage, a second charge bridging loan allows you to keep that rate intact, as it doesn’t involve refinancing your primary loan.
- Focus on the Deal, Not the Delay: With a second charge bridging loan, you can bid confidently at auction, knowing you have a clear and rapid funding solution in place. This allows you to focus on finding the right property and securing a great deal, rather than worrying about financing timelines.
Understanding the Numbers: LTV and Loan Amounts
When considering a second charge bridging loan, two key terms you’ll encounter are Loan-to-Value (LTV) and the difference between gross and net loan amounts.
Loan-to-Value (LTV) Explained
LTV represents the percentage of a property’s value that a lender is willing to lend against. For second charge bridging loans, the maximum LTV is typically 70% of the property’s current market value, including your existing first charge mortgage.
Here’s how it’s calculated:
- First Charge Mortgage: The outstanding balance of your primary mortgage on the property you are offering as security.
- Second Charge Bridging Loan: The amount you wish to borrow.
- Combined Loan Amount: First Charge Mortgage + Second Charge Bridging Loan.
- LTV Calculation: (Combined Loan Amount / Property Value) x 100
Example:
Let’s say you own a property worth £400,000.
You have an existing first charge mortgage of £150,000.
If the maximum LTV is 70%, the total debt secured against the property cannot exceed:
£400,000 (Property Value) x 0.70 (70% LTV) = £280,000
Since your existing first charge mortgage is £150,000, the maximum second charge bridging loan you could potentially secure would be:
£280,000 (Max Total Debt) – £150,000 (First Charge Mortgage) = £130,000
This calculation ensures that the lender has sufficient security in the event of a default.
Gross vs. Net Loan Amounts
When you receive a loan offer, you’ll often see a distinction between the ‘gross’ and ‘net’ loan amount.
- Gross Loan Amount: This is the total loan amount agreed upon, including all fees, charges, and sometimes even the rolled-up interest (if applicable for your loan structure) that will be added to the principal.
- Net Loan Amount: This is the actual cash amount you will receive in your bank account after all fees, charges, and potentially some interest (if deducted upfront or ‘rolled up’) have been accounted for.
What makes up the difference?
The difference between gross and net typically includes:
- Lender Arrangement Fees: An upfront fee charged by the lender for arranging the loan, usually a percentage of the gross loan amount (e.g., 1-2%).
- Valuation Fees: Costs for a professional valuation of the security property.
- Legal Fees: Your legal costs and potentially the lender’s legal costs (which you might be required to cover).
- Broker Fees: If you’ve used a broker, their fee might be deducted from the loan.
- Exit Fees: Sometimes, an exit fee (another percentage of the loan or initial purchase price) is charged when the loan is repaid. For bridging loans, this is often ‘rolled up’ into the gross loan amount.
- Interest: For ‘rolled-up’ interest bridging loans, the total interest for the loan term is calculated and added to the gross loan amount, meaning you don’t make monthly repayments but repay it all at the end.
Understanding these components is crucial for knowing exactly how much cash you’ll have available to fund your auction purchase and associated costs.
Your Guide to Applying for a Second Charge Bridging Loan
Applying for a second charge bridging loan is typically a much swifter process than traditional mortgage applications, but it still follows a structured approach. Here’s a general guide:
- Initial Enquiry & Consultation:
- Reach out to a specialist bridging loan broker or lender like Sunrise Commercial.
- Provide initial details about your current property (value, existing mortgage), the auction property you’re interested in, your financial position, and your plans for the new property (e.g., refurbishment, resale).
- This is a crucial step for us to understand your needs and assess initial feasibility.
- Agreement in Principle (AIP):
- Based on the initial information, the lender can often provide an Agreement in Principle, outlining the indicative loan amount, rates, and terms. This gives you confidence before bidding at auction.
- Application Submission & Documentation:
- Complete a formal application form.
- Gather necessary documents, which typically include:
- Proof of ID and address (Passport, Driving License, Utility Bills)
- Bank statements (personal and business, if applicable)
- Details of your existing property (valuation, mortgage statements)
- Information on the auction property (auction catalogue details, purchase price)
- Details of your exit strategy (how you plan to repay the bridging loan, e.g., sale of property, refinance, sale of another asset).
- Valuation & Underwriting:
- The lender will arrange for a professional valuation of the property you’re offering as security.
- The underwriting team will review all your documentation, assess your financial standing, and verify your exit strategy.
- Legal Due Diligence:
- Solicitors for both you and the lender will conduct legal checks on the properties and draw up the loan agreement. This is where the ‘second charge’ is legally registered against your property.
- Offer & Completion:
- Once all checks are satisfactory, a formal loan offer will be issued.
- Upon your acceptance and your solicitor’s confirmation that all legal requirements are met, the funds are released. This typically happens very quickly after the offer is accepted.
Your Path to Auction Success Starts Here
Don’t let the tight deadlines of property auctions deter you from finding your next big opportunity. Second charge bridging loans provide the financial agility and speed you need to compete effectively and secure those lucrative deals.
At Sunrise Commercial, we specialise in helping inexperienced property developers and investors navigate the complexities of property finance. We understand the unique pressures of auction purchases and can provide tailored second charge bridging loan solutions designed to help you act fast and win.
Ready to explore how a second charge bridging loan can unlock your auction potential? Contact us today for a no-obligation consultation. Let’s discuss your next project and ensure you’re auction-ready!
For more information contact us for a fees free chat.
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