Renovation mortgages explained

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?

Double fronted period home with grey front door

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?

Exterior of four bedroom detached house with a long front path and red front door

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?

grey shaker kitchen with white worktop and vintage shelving

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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