Mortgage Retention: How does it work?

In this article, we’ll explain mortgage retention, why certain conditions are sometimes placed on mortgage offers and how a broker can help you secure the approval you need.

What is mortgage retention?

Mortgage retention occurs when a lender refuses to release the whole mortgage fund to a customer at the start of the term. Instead, they hold back a proportion of the funds, or, more rarely, 100% of the funds, which will be released once certain essential works have been carried out.

This usually happens when defects are considered significant, but the surveyor finds them fixable.

How does it work?

Once the lender has accepted an application based on affordability, credit checks, and other eligibility criteria, they will turn their attention to the property, reviewing the results of legal searches and a valuation report.

As part of that valuation report, the surveyor will assess the property’s worth and recommend any repairs that may be needed to align its true market value with the asking price. One way the lender can respond to any shortfall between the two figures is to impose mortgage retention.

If the buyer agrees to retention, the lender makes them an ‘offer of advance’ and releases part of the funds on completion as normal, holding back the remainder until the works are completed. The amount held back is usually based on the estimated work cost.

So if you wanted to take out a £200,000 mortgage and the lender identified defects expected to cost £10,000 to repair, they might make you an offer of £190,000 and release the remaining £10,000 to you once the works are complete.

The lender can either insist that works are carried out before they release the outstanding figure, or they might agree to release the full amount but on condition that they’re completed within an agreed timeframe.

What about full or 100% retention?

In more extreme cases, lenders can impose a 100% retention, meaning that they will not release any of the funds until the identified problems are fully resolved. This proposal is usually issued pending a report by a structural engineer.

Full retention is not very common and tends to happen when a property has multiple significant defects or is deemed completely uninhabitable in its present condition. Many buyers choose to withdraw their application at this stage; however, an alternative option is to renegotiate the purchase price with the seller.

Occasionally, buyers do decide to proceed with an offer contingent on full mortgage retention, but this is extremely risky unless they have substantial funds to cover not only the cost of repairs but, ideally, the cost of buying the property outright if they are not carried out to the lender’s satisfaction. Legal advice is essential in this situation.

What kind of issues can lead to mortgage retention?

A lender will only hold back funds if serious problems are identified, so this wouldn’t include cosmetic or decorative issues and wouldn’t normally include more minor works that are commonly recommended, such as re-plastering a ceiling or many routine electrical upgrades.

Different lenders will have their ideas about what constitutes a serious structural issue, so if one refuses to release all funds simultaneously, another lender may agree. On the other hand, a different lender may view the same defects as too serious and not make you an offer at all.

Common reasons for mortgage retention include, but are not limited to:

• Damp and mould
• Electrical rewiring
• Removal of toxic or harmful materials such as asbestos
• Structural defects
• Invasive plants, e.g. Japanese knotweed
• Heating and boiler issues
• Roof repairs

How can it be avoided?

A full structural survey is always recommended when buying an older property or one classed as non-standard construction. If you have any concerns about the condition of a property you’re tempted to buy, it will allow you to assess the situation before completion.

What are your options?

If a lender imposes mortgage retention on your purchase, the main options open to you are:

• Withdraw
• Renegotiate
• Proceed

If you decide to withdraw, you will lose some of your upfront costs, including legal fees and the survey cost, but this may be small compared to what you could lose by going ahead with the purchase.

You could try to renegotiate if you still want the property but don’t accept the lender’s conditions. You can usually do this without pulling out of the purchase altogether, so if successful, you won’t lose solicitors’ or surveyor’s fees.

In this scenario, a buyer has the upper hand because it’s unlikely that the property is sellable in its current state of repair. The seller will either have to accept a much lower offer or agree to carry out and fund the extensive work themselves, which they may not be able to afford.

If the lender’s proposition is acceptable to you and you’re confident that you can cover the costs of the works, you can accept the ‘offer of advance’ and go ahead with the purchase at its original agreed price. But you must take legal advice as you’ll be proceeding at some degree of risk, however small the amount being retained.

Things to consider if you go ahead

If you decide to proceed with the ‘offer of advance,’ you will need to be confident about your cash flow or be able to borrow more funds to ensure you have enough to finance what is now a more complicated purchase.

That’s because you will still be committed to transferring the full asking price to the seller in the usual timeframe, so you will have to be able to cover this while the remainder is being held back. But in addition to this shortfall, you will also be responsible for covering the cost of the work.

Borrowing more money to cover the difference 

This may sometimes mean borrowing more funds on a credit card or overdraft or, depending on the amounts involved, a more structured borrowing solution such as a personal loan. Of course, once the retention is released, you should be able to repay any outstanding finance, but you may be subject to early repayment charges (ERC) if you opt for a personal loan.

How a broker can help find the right solution

Brokers are useful allies when finding a lender that supports a specific strategy. If you’re comfortable with the idea of mortgage retention, have funds set aside for repairs, and would choose this route over a potentially messy negotiation with the seller, they can recommend lenders that regularly make this type of offer.

If you get in touch, we can arrange for a broker we work with to contact you. With their extensive experience in this field, they’ll give you access to more deals than if you were to do the research yourself, as not all will be visible to the public.

Which lenders impose mortgage retention, and which may overlook them?

The following lenders impose suggested retentions, however low the amount.

• TSB

• Penrith

• Suffolk

• Virgin

The following lenders state that they can potentially overlook small suggested retentions as long as they are below a certain cost, usually £5,000 or less.

• Principality and West Brom will not impose any retention for works totalling £5,000 or less.

• Aldermore, Furness, HSBC, Leeds, NatWest, Skipton and others can potentially ignore ‘small’ suggested retentions but do not state a figure.
• Bank of Ireland can potentially ignore small suggested retentions and only offer 100% retention in cases where the valuer deems the work essential.

Finally, some lenders, including the following, do not apply retentions in any circumstances and will, therefore, either make an offer that reflects the property’s existing condition or reject the application altogether.

• Accord Mortgages

• Pepper Money

• Bluestone Mortgages

• Precise Mortgages

Get matched with a broker with experience in mortgage retention

Whatever your stance on mortgage retention, working with an experienced broker will maximise your chances of getting a deal that works for your purchase. Make an enquiry today or call us on 0330 818 7026 and we’ll be happy to put you in touch with one of the highly-rated brokers on our books for a consultation.