In a private sale you can usually make your offer subject to finance and rely on a cooling off period. An auction removes both. The highest bid at or above the reserve creates a binding contract the moment the hammer falls, and the terms are the ones the vendor set beforehand.
This guide looks at auctions from the finance side: what pre-approval does and does not cover, how the deposit is paid, how to set a limit that survives a conservative valuation, and what happens if you cannot settle. Auction rules differ between states, so treat the legal points as general information and get advice from a solicitor or conveyancer before you bid.
How auction contracts work and why they are unconditional
At an auction you bid on the vendor's contract as it stands. You cannot add a subject to finance condition or a building inspection condition unless the vendor agrees before the auction, which is rare. State consumer agencies confirm that cooling off rights generally do not apply to property bought at auction.
| Feature | Private treaty sale | Auction sale |
|---|---|---|
| Subject to finance clause | Commonly negotiated | Not available unless the vendor agrees beforehand |
| Cooling off period | Available in most states, with conditions | Generally does not apply |
| Deposit | Often a holding amount, then the balance | Commonly 10%, paid when the contract is signed on the day |
| Building and pest inspection | Can be a contract condition | Must be done before auction day |
| When your loan must be ready | Within the finance period | Before you bid |
General position only. Rules differ by state and territory, so confirm with a solicitor or conveyancer.
All the risk a finance clause would normally carry sits with you. If your loan is declined, delayed or approved for less than you need, the contract still stands, the settlement date still applies and your deposit is on the line.
Why pre-approval is not a guarantee at auction
Pre-approval, also called conditional approval, tells you roughly how much a lender will lend based on your income, debts and credit file. It commonly lasts about three months and always carries conditions. The loan pre-approval guide explains the difference between a fully assessed pre-approval and a quick automated one.
- The property has not been valued. A lender's valuation below your purchase price reduces the loan.
- The property may not suit the lender, for example very small apartments, some postcodes, or homes with serious defects.
- Your circumstances can change. A new job, new debt or a drop in income before settlement triggers a reassessment.
- If you need mortgage insurance, the insurer also has to approve the loan.
The valuation shortfall is the one that catches bidders. Lenders lend against the lower of the purchase price and their valuation. Competitive bidding can push the price past what comparable sales support, and you only find out after you are committed. Some lenders will order a valuation before auction on request, so ask.
Setting a limit around the lender's valuation, with a worked example
Borrowing power plus savings is the ceiling, not the limit. A sound limit also tests whether you have the cash to cover a valuation that comes in under the price. At 90% LVR, every $10,000 of valuation shortfall needs about $9,000 of extra cash from you. At 80% it is $8,000.
Sam has $140,000 in savings and pre-approval for a 90% loan. Sam wins an auction at $850,000. Duty, legal and other costs are assumed at $38,000 for illustration. The plan was a loan of $765,000, leaving $85,000 plus $38,000, a total of $123,000, to come from savings. That left a $17,000 buffer. The lender's valuer then values the property at $810,000.
| Item | Valued at price | Valued at $810,000 |
|---|---|---|
| Purchase price | $850,000 | $850,000 |
| Loan at 90% of valuation | $765,000 | $729,000 |
| Cash needed towards the price | $85,000 | $121,000 |
| Assumed duty and costs | $38,000 | $38,000 |
| Total cash needed | $123,000 | $159,000 |
| Savings available | $140,000 | $140,000 |
| Result | $17,000 buffer | $19,000 short |
Illustrative only. Any lenders mortgage insurance premium is assumed to be added to the loan and is ignored here.
A valuation 4.7% under the price turned a comfortable purchase into a $19,000 hole, with a binding contract already signed. Work backwards from your cash, test a valuation 5% to 10% under your top bid, and set the limit where you can still settle. Remember that stamp duty rises with the price.
Paying the deposit on auction day
The winning bidder signs the contract and pays the deposit straight away. The amount is set by the contract and is commonly 10% of the price, though there is no fixed legal minimum and a vendor can agree to less if you ask before the auction. The deposit is held in trust until settlement.
- Ask the agent before auction day which payment methods are accepted. Electronic transfer, bank cheque and personal cheque are all used.
- Check your daily transfer limit with your bank and raise it in advance if needed.
- If your deposit is tied up in equity or a term deposit, arrange access early. A lender can take weeks to release equity.
Deposit bonds
A deposit bond is a guarantee from an insurer that the deposit will be paid, bought for a one-off fee. You pay the full price at settlement. Bonds suit buyers whose cash is locked in another property, but the vendor must agree to accept one before the auction.
What to complete before auction day
The work a finance clause and cooling off period would normally allow has to be finished before you bid. It costs money for every property you pursue, including the ones you miss, so budget for it from the start.
- Contract review by a solicitor or conveyancer, including the settlement period, inclusions, easements and any special conditions.
- Building and pest inspection, plus a strata report for units. Defects found after the hammer falls are yours.
- Fully assessed pre-approval, with the lender told the property address so postcode and property type can be checked.
- An upfront valuation if your lender offers one, or at least recent comparable sales that support your limit.
- Negotiated changes to the contract, such as a longer settlement or a smaller deposit, agreed in writing before the auction.
Pre-auction offers and buying before auction
Vendors can accept an offer before the auction. Agents usually expect such offers to be on auction terms: unconditional, with a full deposit and sometimes a short deadline. Depending on the state and the timing, a contract signed close to the auction date may have no cooling off period either, so prepare as you would for the auction itself.
If a property passes in, the highest bidder usually gets the first chance to negotiate with the vendor. Ask your solicitor whether a contract signed after a passed in auction can include conditions or a cooling off period, because the rules vary by state.
Lenders mortgage insurance and high LVR risk at auction
The smaller your deposit, the less room you have for anything to go wrong. Above 80% LVR most loans need lenders mortgage insurance, so two parties must approve the loan after you have already bought. Insurers can be stricter than lenders on property type, location and employment.
A low valuation also lifts your LVR. If it pushes you from 88% to above 90%, or past the lender's maximum, the premium rises or the loan no longer fits policy. Buyers with a 20% deposit can absorb a modest shortfall by accepting a higher LVR. Buyers at 95% cannot, and must find cash.
First home buyers face two extra traps. Government guarantee schemes and state duty concessions have property price caps or thresholds. A bid over the cap can remove support you were relying on, changing your deposit and duty figures after the fact. Check the limits for your area on the first home buyer loans page before setting your maximum.
Settlement, bridging finance and what happens if you cannot settle
The settlement period is written into the contract, commonly 30 to 90 days depending on the state and the vendor. Send the signed contract to your lender or broker immediately so formal approval, valuation and loan documents can be completed in time. The property settlement process guide sets out each step.
If you are selling another home to fund the purchase, the dates may not line up. A bridging loan can cover the gap, but it must be approved before you bid, and the lender will assess both properties. A longer settlement negotiated before the auction is often the cheaper fix.
If you cannot complete
In general terms, a buyer who fails to settle is in breach of contract. The vendor can typically charge penalty interest for delay, issue a notice to complete, and then terminate the contract and keep the deposit. If the property resells for less, the vendor may also claim the loss and costs from you. The detail depends on the contract and the state, so speak to your solicitor at the first sign of trouble.
State differences at a glance
Several states, including New South Wales and Queensland, require bidders to register with identification before the auction. Rules on vendor bids differ: they are generally permitted if announced, with limits such as a single vendor bid in New South Wales.
Common mistakes when financing an auction purchase
These mistakes are hard to reverse once the contract is signed.
Treating pre-approval as final approval
A pre-approval letter feels like permission to bid to the maximum. It is conditional on valuation, the property itself and unchanged circumstances, and some pre-approvals are issued without being reviewed by a credit assessor.
Get a fully assessed pre-approval and ask what conditions remain before you bid.
Bidding to borrowing power with no buffer
Buyers set their limit at savings plus maximum loan. A valuation only a few per cent under the price then leaves a cash gap they cannot fill, with a binding contract and a deposit at risk.
Set your limit so you can still settle if the valuation is 5% to 10% below your bid.
Skipping inspections to save money
Paying for reports on a property you might not win feels wasteful, but there is no inspection clause at auction. Structural, pest or strata problems found later are yours, and they can also affect the valuation.
Budget for a contract review and inspections on every property you seriously intend to bid on.
Not organising the deposit in advance
Winning bidders sometimes find their transfer limit is too low or the agent will not take a personal cheque. Failing to pay the deposit on the day can put the contract in default immediately.
Confirm the payment method with the agent and have cleared funds accessible before auction day.
