If you win a house at auction in Sydney, the contract is binding the moment the hammer falls. There is no cooling-off period, no finance clause and no second look at the building report. The deposit, usually ten percent, is due that day, and settlement follows in around six weeks.

So the finance has to be settled before you raise your hand, not after. Here is what that actually involves.

What a pre-approval does and does not cover

A pre-approval tells you roughly how much a lender is willing to lend you, based on your income, debts and living costs. It is a useful number to have. It is not a guarantee.

The lender still has to value the property you buy, and still has to check your documents again before it releases funds. Pre-approvals also expire, commonly after a few months, so one you got in the spring may have lapsed by the time you find the right house. Check the date.

Where this catches people is when they treat the approved figure as the budget. Your budget is the lower of what the lender will lend and what you are comfortable repaying. Those are often different numbers.

The valuation risk

At auction the price is whatever the room decides. The lender's valuer works from comparable sales, and in a hot campaign those two can sit a long way apart.

If the property values below your purchase price, the lender lends against the lower figure. You make up the difference in cash, on top of your deposit, with no way out of the contract. The practical answer is to know before auction day how much room you have if that happens, and to bid to a number you can fund even with a short valuation.

Work out your real ceiling, costs included

The hammer price is not the full cost. Stamp duty, legal fees, inspections, lender fees and any lenders mortgage insurance all need to be paid for, and most of them are due at or before settlement. First home buyers may be eligible for stamp duty concessions in NSW, and that can change the maths a lot, so check where you sit before you set a limit.

Add up the deposit, the costs and a buffer, then work backwards to a maximum bid. Write it down. People do bid past their number in the heat of an auction, and a figure on paper helps you stop.

Have the deposit ready on the day

The deposit is usually payable at exchange, which at auction means straight after the hammer. If your funds are tied up in a term deposit, an offset account at another bank or the proceeds of another sale, sort that out beforehand. A deposit bond can cover the deposit if cash is not available on the day, though it has its own cost and it does not reduce the balance owing at settlement.

If you still have a property to sell

This is the situation we see most often from Willoughby, Lindfield, Mosman and Manly buyers. You cannot make an auction purchase subject to sale, so the finance for the gap has to be arranged first. That might mean releasing equity from your current home, a bridging loan, or negotiating a longer settlement if you win. Our guide to buying before you sell covers the options in more detail.

Before auction day: a short checklist

  • Confirm your pre-approval is current and what it was based on.
  • Ask your broker what happens if the valuation falls short, and how much cash that would take.
  • Have the solicitor or conveyancer read the contract before the auction, not after.
  • Set a maximum bid that includes all costs, and agree it with whoever is buying with you.
  • Line up the deposit so it can be paid on the day.
  • Keep a plan for the property you are selling, if there is one.

If you miss out

Most auctions do not end with a sale to the people who are bidding, and plenty of buyers lose one or two before winning. A properly structured pre-approval means you can move quickly on the next one, or make an offer before auction if the vendor is open to it, without starting the finance from scratch.

If you are looking in the area and want your numbers sorted before the next open home, talk to a Sabea broker. We compare more than 60 lenders and can tell you which ones are likely to be comfortable with the property you have your eye on.

General information only. It does not take your objectives, financial situation or needs into account, and it is not credit or financial advice. Lender policy, rates and eligibility change regularly and vary between lenders — talk to us about your own circumstances before acting on anything here.