MT Finance has helped buyers complete the purchase of an uninhabitable property bought at auction after its condition meant traditional mortgage finance was not an option.
The residential property, in the YO21 postcode area, had a value of £177,000. The buyers needed £115,000 to complete the auction purchase, but the property was subject to a prohibition order because of safety concerns.
This meant the property could not legally be occupied and presented a significant challenge for conventional mortgage lenders.
With the auction purchase already agreed, the buyers were working to a tight completion deadline. They had paid their auction deposit and needed to find a suitable source of finance quickly to avoid the risk of being unable to complete.
The buyers had initially approached another specialist lender. However, that lender withdrew its offer, leaving the buyers needing an alternative solution.
Their broker then approached MT Finance, which was able to provide a first charge bridging loan of £115,000.
The loan was arranged at 65% loan-to-value, based on the property’s valuation. According to MT Finance, the valuation was instructed quickly while the legal work progressed at the same time.
The finance was released within 10 working days, allowing the buyers to complete the purchase.
The property required significant work before it could be occupied. The planned renovation included replacing the plumbing, roof and electrical system, as well as installing new windows and carrying out damp proofing.
The buyers took a 12-month bridging facility to give them time to carry out the work.
Their planned exit strategy was to sell the refurbished property and use the proceeds to repay the bridging loan. MT Finance says the facility did not have early repayment or exit fees if the loan was repaid before the end of the term.
The case highlights one of the challenges faced by buyers looking at properties sold through auction.
Why auction properties can need specialist finance
Properties sold at auction can range from conventional homes that need little work to buildings requiring substantial renovation.
Some may be sold because they have been repossessed, while others may be difficult to sell through the traditional estate agency market. Properties can also be sold following probate, particularly where an estate needs to dispose of a property.
For buyers, auction can provide a way to purchase a property through a competitive bidding process. However, the process comes with strict deadlines.
In a traditional property auction, the successful bidder normally becomes legally committed to the purchase when the hammer falls, subject to the auction’s conditions.
The buyer will usually need to pay a deposit and complete the purchase within the specified timeframe. This means finance needs to be considered before bidding rather than after the property has been secured.
This is particularly important when the property is in poor condition.
Why an uninhabitable property can be difficult to mortgage
A standard residential mortgage is generally designed for properties that are suitable to live in.
Where a property has serious problems with its structure, roof, plumbing, electricity or other essential systems, a high street lender may not be willing to provide a conventional mortgage.
In the MT Finance case, the prohibition order meant the property could not be occupied, adding another obstacle to obtaining standard mortgage finance.
For an auction buyer, this can create a difficult situation. The property may represent an investment opportunity, but the buyer still needs to find the funds to complete the purchase within the auction’s deadline.
This is where bridging finance can provide an alternative.
How auction bridging finance works
Bridging finance is a short-term form of borrowing that can be used when a property needs to be purchased quickly or does not currently meet the requirements of a conventional mortgage.
For auction buyers, a bridging loan can provide the capital needed to complete within the required timeframe.
With specific auction finance, the buyer wins the property at auction and pays a 10% deposit and has 28 days to come up with the remaining 90%, or risk losing the property. At this point, the buyer might use savings or other investors, or failing that, use bridging finance to complete the terms.
The borrower then needs to have a clear plan for repaying the loan. This is known as the exit strategy.
In some cases, the borrower may refinance onto a standard mortgage after completing renovation work. In other cases, they may sell the property and use the sale proceeds to repay the bridge.
The loan is secured against the property, and the lender will consider factors such as its current value, the proposed works, the borrower’s circumstances and the planned exit.
In the YO21 case, MT Finance provided the £115,000 required to complete the auction purchase while the buyers planned and carried out substantial improvements.
The 12-month term gave them time to undertake the work before selling the property.
