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What are self-build and auction finance?

Self-build finance is a bespoke property finance arrangement that provides the much-needed funding to those building their own property. Self-build finance is treated as a regulated mortgage contract as their associated projects tend to be the primary place of residence of the borrower which is defined as a property in which 40% or more is used as a primary place of abode.

There are a range of specific and bespoke property finance options available depending on the nature of the project and it is important that prospective borrowers select the correct product when doing their research. For example, auction finance is specifically tailored to those attending property auctions and development finance is tailored to the needs of property developers with a portfolio.

Self-build finance, however, is different in both its nature and how it is lent and repaid. Because it is designed for the specific purpose of funding one’s own property construction, there are various terms conditions to this specific type of finance.

How Does Self-Build Finance Work?

Unlike other forms of property finance that are provided by a lender in one go, secured against a chosen property that acts as security on the loan, self-build loans are released in stages, reflecting the matching stages of the property’s construction. Furthermore, self-build loans are first charge mortgages on their given property unlike other property finance such as mezzanine finance or similar.

Each stage of the build of the new property releases another stage of funding of the loan. For example, the first phase of a property’s construction is the purchasing of the land upon which it will be built and this is the first stage of funding provided. Next, the foundations need to be dug and the necessary elements laid down for the property and this is the second stage. After this is complete, there comes the framework of the property then the external walls’ construction.

Finally, there is the ‘first fix and plastering’ phase followed by the final ‘second fix and completion’ stage. The money is provided according to these stages.

A major benefit of the loan being provided in this way is that there is less risk to the lender and the borrower. Therefore, the cost of a self-build loan tends to be lower than that for other types of property finance making it a more attractive lending and borrowing proposition all round.

What Makes Auction Finance Different?

Most specialised forms of property finance including auction finance have a time restriction on them. In the case of bridging finance, the borrower must have an exit strategy in place or at least a viable strategy from the outset that will allow them to exit [repay and close] the loan. Auction finance, however, has a much more pressing nature to it.

Whereas other finance can be repaid over the course of a year or perhaps even a few years, auction finance requires the buyer of the auction property must fully pay off the property’s purchase price (to the auction house) within 28 days. Furthermore, as soon as a gavel falls at auction, the buyer is entered into a legally binding contract that requires them to pay the agreed purchase price.

Additionally, whilst other property finance arrangements such as bridging finance naturally require the buyer to account for a portion of the property value, auction finance requires a set percentage (10%) be available immediately. For example, in the case of bridging finance, the borrower will negotiate with the lender to provide 100% of the new property’s value, with interest added on top.

The borrower will then await the sale of their first property to fund the loan repayment with any further outstanding balance covered by taking out a mortgage on the new property.

Auction finance though requires the 10% as soon as the sale is agreed and this can be a large amount of money. For example, a property bought for £500,000 at auction will require the buyer to have £50,000 available there and then to ‘hand over’ as a holding deposit to the auction house. 

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