Renovation Mortgages – Everything You Need to Know

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A renovation mortgage is much like other mortgages, with a caveat – the funds cover both the property purchase and a renovation project. Unlike a conventional mortgage, the property has to be uninhabitable or at least one that requires work to get it up to acceptable living standards. The mortgage will reflect a combination of costs associated with the purchase as well as renovation costs.

Your choice of renovation mortgage can significantly change how feasible and financially viable your renovation projects are. This includes:

This guide is intended to help outline the finer details of renovation mortgages, including their types, features, and how to go about finding one.

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The Types of Renovation Mortgages

Renovation mortgages can be tailored to meet the various needs of a project. Here are the primary types of renovation mortgages available.

Conventional Mortgage

A conventional mortgage is a standard mortgage aside from the refurbishing/renovation project involved. They are offered by the same high-street lenders you’d go to for more common mortgages. 

The following are the features you can expect from a conventional mortgage:

  • Deposit – A renovation mortgage requires a downpayment, typically 10-20% of the property price.
  • Renovation Costs – The loan that you acquire will account for both the purchase price of the fixer-upper property and any renovation costs. This makes project management much easier.
  • Staged Payments – Funds are released periodically – these periods are usually tied to milestones in the renovation projects. This ensures that over-expenditure doesn’t happen.

Bridging Loans

A bridging loan is a short-term finance option for lenders who need quick funding. These loans are chosen when funds need to be raised immediately, or when an opportunity is about to pass (such as on the market). Bridging loans feature higher interest rates and are often secured against the current value of the property.

  • High Interest Rate – Bridging loans are very short-term, and require immediate release of funds. This expediency often includes risk, which is offset by a higher interest rate.
  • Secured Loan – A bridging loan is secured against the value of the property. There are also terms that require quick repayment once the long-term financing has been arranged.
  • Bridging Finance – Ideal for bridging the financial gaps during the early stages of property renovation, especially when traditional financing is off the table due to conditioning.

Stage Payment Mortgage

A stage payment mortgage is designed for renovation projects that will go on for a long time. It works by basing the projected value of the property post-renovation, making it suitable for projects with significant structural changes that require planning permission. Nonetheless, the stage payments will come in phases, such as foundational laying, framing completion etc.

  • Project Management – These mortgages require a comprehensive overview of the different stages of the renovation, including expected costs.
  • Funds Disbursement – Mortgage lenders will send inspections to ensure the construction is going ahead as planned and is meeting targets.
  • Suitable for Major Renovations – This mortgage is particularly useful for properties that are undergoing foundational transformations.

Buy to Let Mortgage

A buy-to-let renovation mortgage caters especially to investors who intend to renovate and rent the properties. Such mortgages consider potential rental income as part of the lending decision and are ideal for buyers focusing on a renovation property but are unsure about the possibility of unexpected costs.

  • Consideration of Rental Income – Lenders’ assessment of your projected rental income can mean you can gain extended capital within your mortgage.
  • Investment Focus – This mortgage type is tailored for the long-term income potential of a property. The longer-reaching your designs, the more you can get out of this type of deal.
  • Additional Loan Options – Since this mortgage extends beyond the actual renovation of the properties, and places a lot of weight on the potential income, mortgage lenders are usually open to an additional loan or help if the expected value of the property is high.

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Key Features of a Renovation Mortgage

Loan-to-Value

Loan-to-value is a critical factor in renovation mortgages. It is the percentage factor of a property’s total cost that the mortgage will cover. For a renovation mortgage, the LTV relates not only to the purchase price of the property, but also the cost of necessary renovations. Typically, a mortgage lender will offer a maximum LTV of 75% through to 90%, although this will depend majorly on the creditworthiness and the projected property value post-renovation. LTV determines the down payment needed and has a large role in determining the overall interest rates.

Interest Rates

The interest rate of a renovation mortgage varies widely. It is often higher than those of conventional mortgages due to the perceived additional risk involved. Terms are set for 5 to 30 years, typically, with rates either being fixed or variable depending on the scale of the renovation project or borrower’s preferences. Payment terms may also include options for interest-only periods, which is useful for the renovation phase when the house can not be used as a home.

Eligibility Criteria

Typically, the eligibility criteria to get a renovation mortgage include:

  • Credit History – As with all long-term financial contracts, a good credit score directly translates to better terms. With a good credit score, you can expect your renovation mortgage to come with a lower interest rate and a higher borrowing amount. That being said, if your credit rating and history are poor – don’t worry. When the Bank Says No are excellent mortgage brokers with access to specialist lenders who work with people in these exact circumstances.
  • Financial Circumstances – A lender will require an overview of the financial circumstances of the borrower, to ensure aspects such as income stability, debt-to-income ratio and existing financial commitments – as these all play into risk evaluation and capabilities of the borrower.
  • Property Value and Condition – A significant element of the lending decision lies in the current value of the property, as well as the potential value of its post-renovation. A lender is much more likely to approve the mortgage if the renovation project is comprehensive, with assessments being attributed by architects or planners.

Steps to Getting a Renovation Mortgage

The following are the three main steps to getting a renovation mortgage:

  1. Preparing your Credit Report – Before the mortgage application, it’s crucial to ensure that your credit report is accurate, but also reflects your creditworthiness positively. To start, obtain a copy of your credit report from a credit agency, such as Experian or Equifax, and review it carefully for discrepancies. This can be anything from incorrect account details to fraudulent activities. They will require disputing with the credit agency if found. Nonetheless, your credit report needs to be as presentable and accurate as possible.
  2. Assessing your Financial Circumstances – UK mortgage lenders look at debt-to-income ratios so a borrower can properly manage mortgage payments, with particular interest in other existing financial obligations that may make repayment difficult. You will be required to demonstrate stable income, which can be from employment, self-employment or another source of income that is considered reliable.
  3. Finding the Right Property – The art of choosing a property for a mortgage in the UK is worthy of its own guide. At the very least, we recommend you get help from estate agent specialists who understand how to evaluate properties and analyse their locations. Furthermore, there will have to be considerations when it comes to budgets and any possible planning permission issues that could become a roadblock later down the line.
  4. Documentation Gathering – The documents required are fairly extensive:
Document Type Description
Proof of Identity Valid passport or driving licence to verify your identity.
Proof of Income Recent payslips, tax returns, or profit and loss statements for the self-employed.
Proof of Address Recent utility bills, council tax bill, or bank statements.
Credit Report A recent copy of your credit report from a recognised credit agency.
Property Details Details about the property you intend to buy, including the estate agent’s listing.
Renovation Plans Detailed plans of the proposed renovations, potentially including architectural drawings.
Cost Estimates Itemised cost estimates for the renovation from contractors.
Planning Permission Documents Copies of any planning permissions granted or applied for related to the property or renovations.
Mortgage Statements Statements for any existing mortgages or loans secured against the property.
Deposit Proof Evidence of funds for the deposit, such as savings account statements.

Project Management Plans

Your project management plans will involve detailed documentation that outlines the scope, timeline, budget and crucial details of a renovation property project. They are essential for securing funding as they serve as proof work will be pursued towards the specific end of creating habitable properties.

The plans are typically exhaustive, but this is what you can expect to see:

  1. Project Scope – You must detail the listings of all planned renovations and distinguish between structural changes and cosmetic improvements. It must be clear as to what the renovations aim to achieve, such as an increase in property value, improved functionality and energy efficiency enhancement.
  2. Timeline – A timeline for each phase of the project is required, from the beginning of demolition work to the finishing touches. Within the timeline are key dates for starting and completing phases of renovation, which is key for renovation mortgages requiring stages for loan disbursements.
  3. Budget – The budget will break down materials, labour, permits, emergency funds and/or any other expected expense. The renovation mortgage will not give out more money than it feels it needs to, so it’s important to ensure all costs you foresee are included.
  4. Contractor and Supplier Detail – Detail both the names and qualifications of contractors and subcontractors, as well as all agreements made with them regarding materials and equipment.
  5. Legal and Regulatory Compliance – Include copies and local authority permissions needed for structural changes, with documentation proving compliance with local building codes/standards.
  6. Risk Management – A renovation mortgage is a risk, like all mortgages, and so it’s important to ensure your project management plan has clear identifications of any other risk or challenge associated with the project.
  7. Communication Plan – You will require a strategy to engage with regular updates and consultations with stakeholders. Stakeholders in a renovation mortgage include the lender, contractors and local authorities. Documenting and reporting project progress is a huge bonus to your plans, as it demonstrates transparency and accountability.

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The Risks of a Renovation Mortgage

A renovation mortgage can bring big returns on investments, but it’s worthwhile to note the many risks you run also.

Risks of Fixer Upper Mortgage

  • Structural Issues and Costs – The main culprit of all extra expenses and time consumption in a fixer-upper property.
  • Financial Overruns – An unplanned expense is common, and presents a threat to your realistic budget. Sometimes, this may necessitate additional finance options that may put you at a long-term disadvantage, such as bridging loans.
  • Credit Rating Implications – Buyers who have poor credit history may find securing good renovation mortgage terms hard, and when you have access to lower funds, the likelihood of your overrunning goes up significantly.

Mitigating Risks

  • Comprehensive Property Evaluation – A thorough assessment by specialists can mitigate risks by documenting all foreseeable issues in the structure.
  • Bridging Finance – Utilising bridging loans to get yourself out of a hole when you require more funds is much better than coming to a dead end and risking the complete collapse of your project.
  • Specialist Brokers – Specialist brokers who have access to mortgage lenders who give unique renovation and fixer-upper mortgages are a good way of traversing any issues in viability that you may encounter.

The Rewards of a Renovation Mortgage

The rewards of a renovation are self-explanatory – you have access to a habitable property. But here are the more specific advantages you get as a result.

Strategic Renovations

  • Property Value – Strategic renovations can help an owner climb the property ladder more easily. A strategic renovation is one that renovates no more than is needed to make the property habitable and attractive.
  • Attractive Purchase – If your building has traits that are looked for in the modern age, such as high energy efficiency, you will see its expected value likely increase. Some other features may include an open-plan layout or modern SMART devices.
  • Low Running Costs – If you have energy efficiency measures baked into the project, then you gain the added bonus of having a property with low running costs on top of peerless comfort. This means the property is likely to cater to nearly all types of purchasers.
  • Regulatory Compliance – Ensuring that you comply with all regulations as a base is paramount to ensuring your development goes off without interruptions.

 

Conclusion

A renovation mortgage is as much a risk as it is a reward. As with every mortgage application, we advise you to do due research and consult with experts before going ahead. Nonetheless, ensuring that your renovation property is attractive to buyers is a challenge in and of itself, and makes up a large part of your chance to be successful.

FAQ: Can I get a renovation mortgage with poor credit history?

Yes! It is absolutely possible to secure a renovation mortgage with less-than-ideal credit. How you do this is simple: get in contact with a specialist broker. A specialist mortgage broker’s job, aside from giving you top mortgage advice, is to have access to a wide range of mortgage lenders who are willing to provide renovation mortgage products..

When the Bank Says No is one such specialist company. Regardless of your credit situation, we are likely to be able to find an ideal mortgage provider for your circumstances and needs. Contact us today to see your options.

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Emma Jones
Emma Jones
Emma began her career in Lloyds Banking Group, first in the unsecured & secured loans department at Halifax and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the banks let their customers down by denying loans and mortgages. Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money. Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. One thing Emma has learned through her own personal struggles is every client must be treated like a human and understood better by advisors and lenders in the industry. “We all have to navigate life events which can ultimately impact your financial status. It shouldn’t mean dreams of homeownership or business growth should have the breaks applied”. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.

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