Determined to breathe life into a derelict or uninhabitable property? If you don’t have substantial savings to fund your project, you may need a renovation mortgage.

Perhaps you’ve struck lucky and found an empty property in a great location. Or you want to bring a rundown home back to its former glory. Whatever your dream, you can’t rely on a standard mortgage to pay for the work on the property.

What is a renovation mortgage?

Image credit: Future PLC/Bridget Peirson

Most high street lenders only offer mortgages on properties that are considered habitable. So, if you’re buying a property not currently fit to live in, you’ll need to find a renovation mortgage from a specialist lender. The loan will finance the purchase of a property that’s derelict, in need of conversion, or uninhabitable because it’s without a working kitchen or bathroom.

Standard repayment or interest-only mortgages aren’t suitable for extensive renovations. ‘Mortgage lenders want to know that the property would act as adequate security for their mortgage. And that if the worst came to the worst and they had to repossess the home, they would be able to sell the property at its market value,’ explains David Hollingworth, associate director of broker L&C. ‘This isn’t the case if the property needs substantial renovation.’

The other important feature of a renovation mortgage is that it enables you to borrow the money you need for the work. You’ll receive the money in tranches rather than all upfront.

How does a renovation mortgage work?

Image credit: Future PLC/Simon Whitmore

You may get a mortgage of up to 90% of the property’s value as it stands, depending on your income and circumstances. You should fund the remainder of the purchase from savings, other assets, or borrowing. The lender usually withholds a chunk of the money, and releases it in stages as the property is renovated.

On completion of specific stages, and inspection by the lender’s surveyor, you could receive more money. ‘The money being released in stages allows the renovation to receive funding along the way. It also  enables the next step to commence,’ says Hollingworth. ‘Given the importance of the staged payments it will be vital to do some careful budgeting. Be sure that the finance will work and allow the renovation to proceed all the way to completion.’

Bear in mind that the cost of restoring a building will rapidly add up. You need some savings, or other forms of finance such as personal loans, to pay for work between ‘stage payments’. Look into reducing the amount of upfront cash you’ll need by taking out a specialist renovation insurance policy. This releases stage payments in advance.

Will it cost more than a standard repayment mortgage?

Yes. A renovation mortgage rate will typically be one or two percentage points higher than a standard mortgage. This is because the risk to lenders is greater. There’s no guarantee that the work will be finished. The lender could be forced to repossess the property to recoup their debt.

It also depends on how much you borrow. Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘As loan-to-values creep up, so do the rates. Not only that but application or product fees are also typically higher, ranging from 1% to 2%. There may also be additional survey costs as lenders require pre- and post-work valuations.’

What kind of properties qualify for a renovation mortgage?

Image credit: Future PLC/Tom Meadows

You can get a renovation mortgage on a vast range of “fixer-upper” properties. This covers properties from a listed building that’s fallen into disrepair to a timber shell without a roof. However, the range of mortgages you have to choose from will be far greater if the property to be renovated is habitable. That means it comes with a working kitchen and bathroom.

Where can I get this type of mortgage?

There is a limited number of lenders offering finance for complete renovations. Try lenders offering self build mortgages as a starting point. For example Ecology Building Society specialises in lending on energy efficient properties. Smaller building societies are often a good place to try.

Speak to a mortgage broker to find out about your options. This is a specialist area of the mortgage market and the solution may need to be imaginative. Working with someone independent who knows the market well is a good move.

What happens when the renovation is complete?

Once the renovation is complete, you ideally take out a mainstream mortgage on the property. ‘There is usually a clear and distinct two-step process. A refurbishment loan with a specialist lender, before remortgaging to a high street lender for long term finance,’ says Harris. ‘Or, if your plans have changed, and there are no early redemption charges, you may choose to sell and realise their gains on completion.’

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Millions of UK households are facing further energy price increases now that the energy price cap increase is in effect. But analysts are also predicting another sharp rise of 32% in October.

You may already know how your bills are changing as of 1 April, but will undoubtedly be worried about another steep increase in October. If you want to see how your energy bills could be affected by a second rise later this year, use our calculator below.

The price cap, set by energy regulator Ofgem, is reviewed twice a year and changes are implemented in April and October. It limits how much energy suppliers can charge their customers per kWh of gas and electricity. With the current energy crisis seeing wholesale gas prices skyrocket, the price cap has increased by 54%.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: ‘The global energy price spike started when the economy came back to life last year. As demand for gas increased, we faced lower stock levels and supply problems. We import around 50% of gas, so had to buy it on the international market – where booming demand overwhelmed supply. The wholesale price of gas in January was almost four times higher than in early 2021. We also make a third of our electricity from gas, so it pushed those prices up too.’

The price cap doesn’t apply if you are on a fixed rate tariff, or a standard variable green tariff (which Ofgem has excluded from the cap). But the cap will apply to you if you are on a default energy tariff. Check your last energy bill or speak to your supplier if you are unsure what tariff you are on.

How will energy price increases affect my monthly bills?

So how much will your energy bill rise if the price cap is increased by another 29% in October? Use our calculator to find out. Simply input how much you typically pay per month on your current tariff and we’ll show you how your energy bills could be affected.

How can I reduce my energy bills?

There are usually two main ways to reduce your energy bills – finding a better deal to pay less for the energy you do use, or to use less energy. With the current energy crisis, it is difficult to find cheap deals, so the best way to keep gas and electricity bills low is to focus on reducing your energy usage.

Turning your thermostat down a single degree, sealing up any draughts, and swapping older light bulbs for energy-saving alternatives are some easy ways to reduce your energy usage.

The post Energy price increases: work out how much your gas and electricity will cost you appeared first on Ideal Home.