Advice and Opinion

Things to consider when financing an auction property

Shaun Rademeyer, CEO of Betterbond.
Shaun Rademeyer, CEO of Betterbond.

More and more consumers are finding it difficult to make ends meet in the current economy and property auctions are becoming more common again as a result.

“However, while this might seem like a good thing for property investors hunting for ‘bargain’ buy-to-let opportunities, they should make sure that they have their finances in order before putting in the winning bid”, says Shaun Rademeyer, CEO of BetterLife Home Loans.

“In most cases,” he says, “you will need to be able to pay or provide guarantees for a 10% deposit on the fall of the hammer. You will then need to come up with the balance within a certain time period – usually 30 days – and if you are not paying cash, you will need a home loan”.

“And in that case, it would really be advisable for you to arrange this well in advance, with the help of a reputable mortgage originator, who can guide you through the process and help you obtain pre-approval for a certain amount. An added advantage of doing things this way is that you will know what your spending ‘limit’ is and be less likely to get carried away in the excitement of the auction.”

Rademeyer says the alternative for those who go to auction without arranging a home loan is to make use of personal or bridging loans – but should remember that these usually come at a considerably higher rate of interest that home loans.

“And either way, there are certain documents that you will need to have prepared – including your identity document, proof of residence, proofs of income, bank statements, a list of your assets and liabilities, and a list of your monthly regular and discretionary expenditure”.

“Bearing in mind that in most cases the property you purchase at auction will not be your primary home, lenders may well look for a bigger deposit and only be prepared to approve a home loan at a relatively high rate of interest.”

Meanwhile, he says, you should try to view the property before you bid for it, and also work out the maximum bid you are prepared to make – no matter what.

“Remember, if you overbid, you will be the one that has to deal with the gap between your lenders valuation of the property and the price you have agreed to pay – and will probably have to cover the shortfall yourself.”