Renovation Mortgages Explained
January 21, 2022 (Investorideas.com Newswire) There are many ways to fund property renovations, depending on the scale of the plans such as using own cash or an unsecured loan, however one of the most common ways to finance a larger renovation project is to to apply for a specific mortgage for renovation purposes.
There are a number of different mortgage options available on the market in order to fund property renovations of all types and sizes, which will be discussed throughout this article.
We will also be covering the differences of finance options available depending on the condition of the property and the process of applying for a renovation mortgage.
What is a Renovation Mortgage?
A renovation mortgage is a type of secured loan that provides finances to cover light renovations to a property such as installing a new kitchen or bathroom or aesthetic changes.
The amount that can be borrowed via a renovation mortgage will largely depend on the personal circumstances of the mortgage applicant including their credit score, as well as the property value and condition. Lenders often calculate a maximum loan value by multiplying the applicant or joint applicants’ income by an internally set figure.
Other factors such as outgoings and disposal income levels will also be considered. As a rough guide, most lenders may consider offering up to 80-95% of the current property value to homeowners, property developers or landlords in order to fund renovations.
It is worth noting that each lender will define their own terms including what property condition they will accept to borrow against, however it is often common for high street lenders to require that the property is in a habitable condition in order to consider lending against it.
Why Opt for a Renovation Mortgage?
Even if a property developer, landlord or homeowner has access to a cash budget to cover the cost of renovations, they may still consider applying for a renovation mortgage to allow contingency especially for larger projects where costs escalate pretty quickly.
How Will a Renovation Mortgage work?
The application process for a renovation mortgage will be similar to that for a regular residential mortgage including a property survey and assessing the suitability of the mortgage applicants against the lending criteria.
However, in addition to the standard process, a development plan for the project may be required as well as staged payments depending on the current property condition and proposed schedule of renovation work. In this scenario, some of the funds may be withheld pending completion of various stages of works, that would be inspected at each stage, with attributable inspection costs, borne by the homeowner, property developer or landlord.
Common key stages that would require re-inspection include:
- Damp-proofing of the property
- Roof repairs
- Completion of rewiring
- Repairs or installations of new central heating systems
Due to this process, the homeowner, property developer or landlord must have access to cash or other borrowing in order to cover the costs in between such stages and release of staged funds. In addition, it is advisable to budget for a contingency in case of project delays or a rise in material or labour costs.
Will I Need a Deposit for a Renovation Mortgage?
Yes, a deposit will be required as often lenders will only lend between 80-95% of the property value and therefore the difference will need to be personally funded either by savings or other borrowing.
In addition to the deposit, there are other fees to cover including property surveys, mortgage arrangement and exit fees and any external design fees or broker fees. It is always worth double checking the terms and conditions with any mortgage offer to completely understand all fees applicable and other terms of lending before committing to an offer.
How can I obtain a Renovation Mortgage?
Renovation mortgages may be found on the high street however for more choice or for the more specialised projects, a wider range of mortgage options may be found by using a mortgage broker.
In addition, by using a mortgage broker to search the entire market, a product with the most favourable terms could be sourced and expertly compared.
As well as providing guidance throughout the application process, mortgage brokers can also streamline the process, reducing the stress on an applicant(s) by liaising with the preferred lender throughout the entire process.
When Might a Renovation Mortgage not be Suitable?
Should a project’s cost be estimated at over 15% of the property value or require formal planning permission, often a construction or self-build mortgage would be more appropriate.
Another situation where a renovation mortgage may not be suitable is where the property condition is deemed non-habitable and therefore usually not acceptable for renovation mortgages.
In this case, self build mortgages or bridging loans may be more appropriate finance options. Self build mortgages may be more suitable for larger projects and will often provide advance finance of between 66% and 90% of the property value in its current condition, releasing the finance in stages.
What Other Mortgage Options May be Suitable?
Should the homeowner, property developer or landlord already own the property that they plan to renovate or extend, there are a number of options to raise the finances to cover the development costs as follows:
- Remortgage increasing the value owed to provide the additional financing. It is worth noting although the process to remortgage with the current lender may be simpler, usually this does not offer the most competitive terms and therefore it is often beneficial to shop around.
- A secured home improvement loan. Such loans often have less strict application criteria and can be cheaper than mortgages however they may not have such long repayment terms.
- A non-secured personal loan of up to a maximum of £25,000 and repaid over a period of up to 10 years.
- Another financing option is a bridging loan which provides flexible finance in order for the initial property transaction or development site to be purchased, or for further renovation stages to take place. Bridging loans enable the equity owned within other assets to be utilised and put towards other property purchases or renovation projects, and as such during a period of time two (or more) properties are technically owned. In order to be eligible for a bridging loan, procession of a high value asset is required to secure the finance to. Bridging loans are often favoured especially by property developers due to their cost-effective benefits and flexibility however it is worth remembering that legal and administration fees are applicable.
What is Renovation Insurance, and Do I Need It?
Renovation insurance provides protection should stages in the project go wrong. This is a completely separate policy from home contents or building insurance and is sometimes required by the lender depending on the type of finance used to cover the renovation costs.
As with most insurance policies, the premium prices and cover will vary between insurance companies and therefore it is worth evaluating how much cover is needed and shopping around.
Renovation mortgages can be used to fund smaller projects such as kitchen or bathroom replacements or aesthetics developments that do not require structural changes for example.
The application process for a renovation mortgage is often similar to that of a standard residential mortgage however depending on the scale of the project, development plans may be requested, and staged payments may be implemented by the lender.
The use of a specialised broker is highly recommended so that the whole of the market can be reviewed, and a wider array of finance options can be compared. Brokers can also ensure that the chosen financial product is the most competitive available and that all terms are fully understood.
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