Buying at Auction - Deposits

Holsworth

Hello there wise folk of MSE, after some advice about buying at auction.

There's a property we are looking at buying with a guide price of £120k. We've decided on a max price for us of £150k. We have £75k in the bank and plan to use £40k as a deposit and £35k for renovations. What little there is in the house needs ripping out, and everything needs doing cosmetically (no matter how much my OH loves the very dated wallpaper in the living room!) though structurally the property seems sound (obviously we will get a structural survey done before bidding).

We will need a mortgage to purchase and have an appointment on Monday to apply for agreement in principle. My question is around deposits (plural):

The deposit on the day if successful is 10%, which if we get it for £150k will be £15k. This is no problem, we have the money, but how does it work when it comes to the deposit for a mortgage? I've done calculations based on £150k selling price & £40k deposit therefore £110k mortgage.

Should I instead be looking a £135k final price (i.e. minus the on-the-day-deposit) with £25k deposit (again, minus on-the-day-deposit)? That gives us a higher LTV than the other way (despite loan total being the same) therefore higher monthly payments (which almost feels like being penalised for forking over £15k up front, but then I don't think I'll ever understand the reasoning behind mortgages!).

Any help or advice that can be offered would be very welcome! As a first time buyer this is all very confusing to me, but this house is perfect for us, and is in a fantastic location where houses very rarely go for less than £500k (therefore we'd never be able to afford to live there otherwise!) so I feel we'd be stupid to pass up the opportunity!

anselld

LTV is calculated on the mortgage amount as a percentage of the total purchase price, regardless of when deposit payments are made.
So if it goes for 150 with a 110 mortgage that is 73% ltv.

You pay the 10% on the day and the remaining deposit on completion via your solicitor.

However, you must know you have strictly 28 days (usually) to complete otherwise you are in deep doo-doo. It is risky to say the least to rely on a mortgage for finance in this timescale and on a property which needs significant rennovation.

dimbo61

You need to check with the Lender that they will be happy you are buying a property that needs lots of work as most lenders need to see a working kitchen and bathroom.
If you have the cash in the bank to pay for all the work and a good LTV they may play ball

Holsworth

anselld wrote: »

LTV is calculated on the mortgage amount as a percentage of the total purchase price, regardless of when deposit payments are made.
So if it goes for 150 with a 110 mortgage that is 73% ltv.

You pay the 10% on the day and the remaining deposit on completion via your solicitor.

However, you must know you have strictly 28 days (usually) to complete otherwise you are in deep doo-doo. It is risky to say the least to rely on a mortgage for finance in this timescale and on a property which needs significant rennovation.

Thanks. The part I'm confused by is as the £15k on the day deposit doesn't go to or through a mortgage lender, should I discount it from the calculations? We pay £15k on the day to the auction co, and only after that do we get the mortgage - therefore we only need £135k?

Holsworth

dimbo61 wrote: »

You need to check with the Lender that they will be happy you are buying a property that needs lots of work as most lenders need to see a working kitchen and bathroom.
If you have the cash in the bank to pay for all the work and a good LTV they may play ball

Thank you. It has what just about passes as a kitchen and bathroom (though I personally wouldn't want to use either of them - the essential parts are there!). We will have £35k to do all of that plus decorating/plastering etc. It's only a small 2 bed terrace.

anselld

Holsworth wrote: »

Thanks. The part I'm confused by is as the £15k on the day deposit doesn't go to or through a mortgage lender, should I discount it from the calculations? We pay £15k on the day to the auction co, and only after that do we get the mortgage - therefore we only need £135k?

The clue is in the name ... "loan" to "value".
loan = 110
value = 150

The fact you pay the other 40 in two chunks is completely irrelevant.

It is the same in a normal purchase. 10% would go to the vendors on exchange of contracts. It doesn't go via the lender but that does not alter the value of the purchase either for the lender or for stamp duty etc.

Holsworth

anselld wrote: »

The clue is in the name ... "loan" to "value".
loan = 110
value = 150

The fact you pay the other 40 in two chunks is completely irrelevant.

It is the same in a normal purchase. 10% would go to the vendors on exchange of contracts. It doesn't go via the lender but that does not alter the value of the purchase either for the lender or for stamp duty etc.

Thanks - that makes a bit more sense! As I said, I've not done this before and don't think I'll ever get my head around mortgages!

G_M

Do not bid for this property on the basis of an offer of a mortgage in principle.


You must put in a full mortgage application in advance(and pay the application/valuation fees). The lender will undertake a Valuation before agreeing a full mortgage.

Only then can you bid. The risk is you bid, win, pay your10% deposit, then the lender declines you application and you have then eitherto find the balance elsewhere, orforfeit your 10% (and possibly more).

mail2z

Is your auction buying a well thought through process. Are you a experienced auction buyer or did you see too much of "Homes under hammer"? You cannot rely on the AIP to bid in auction unless you have funds available though temporary to cover completion if there is a problem securing mortgage in time else the learning can be quite expensive.