Renovation Mortgage

If you love a challenge, have some basic skills and are excited by the idea of renovating your own home, or buying a fixer upper to flip, then you’ll need to know how to get a mortgage on a property that needs doing up.

In this guide we’ll talk you through buy-to-renovate mortgages, how they work, what the lending criteria is and where to find a specialist broker that can help you get the best deal.

What is a buy-to-renovate mortgage?

A renovation mortgage, sometimes known as a buy-to-renovate mortgage, is a specialist mortgage designed specifically for people wanting to purchase a property in need of work. There are a few different variations depending on what you need and whether the refurbishment is just cosmetic or whether it requires more substantial building work.

A buy-to-renovate mortgage is different from a conventional mortgage in that lenders look not just at the purchase price, but also the estimated value once work is complete. How much you can borrow will normally be based on this projected value rather than the current value, meaning you can end up borrowing more than the purchase price.

Let’s look at a simple example:

You’re buying a property with a purchase price of £200,000. You estimate that you need to spend £70,000 on it, but that then it will be worth £350,000. Based on a deposit requirement of 25%, you could potentially borrow £262,500 – 75% of the estimated value after completion.

What types of mortgages can you get?

No two renovations are the same and as such there isn’t a one size fits all buy-to-renovate mortgage. One important choice for example is what you plan to do on completion of the project.

• Construction to permanent mortgages – this mortgage has two stages built in from the start. The first stage consists of a renovation mortgage, normally interest only, and then once the refurbishment is complete it converts to a conventional mortgage.
• Construction only mortgages – with this option you commit just to the initial mortgage for the renovation, and then once you’ve finished you go through a separate mortgage application for a second, standard mortgage to pay off and replace the first.

Funds from a buy-to-renovate mortgage will often be released in stages as works are carried out, with interim property inspections to check on progress. In some cases part of the funds may be withheld until the renovation is completely finished and the property is valued.

If you go for a staged payment mortgage it’s important to check whether payments will be made in advance or arrears. If it’s the latter you’ll need a way to fund the project yourself in the meantime.

Getting a conventional mortgage for a fixer upper

Depending on the scale of the work involved and your finances, you might decide that you don’t want a specialist mortgage, but that you’re happy to go for a conventional mortgage just to cover the purchase and not the renovations.

This can be an affordable way to get on the property ladder and is ideal for people who plan to renovate over the long term as they can afford it, who have building skills or have the financial or practical support of family to help carry out work.

You always have the option here of applying for an additional loan either at the same time or further down the line when your financial position is stronger or as the value of the property increases.

How a broker can help if you need to finance a renovation project

Because buy-to-renovate mortgages are a little less commonplace than standard mortgages they can be more difficult to find and it can be harder to compare costs and rates across the different finance options.

Working with a broker who specialises in renovation mortgages is invaluable here – they will have existing relationships with relevant lenders and be able to help you understand your options simply and clearly.

Without the help of a broker you could find yourself paying over the odds for your mortgage, or even being declined, either because you’ve not approached the right lender or haven’t chosen the right product for your circumstances.

Make an online enquiry now and we can match you with a broker specialising in buy-to-renovate mortgages.

Which lenders offer renovation mortgages?

Not every mortgage lender will offer buy-to-renovate mortgages, but this is where your broker proves their worth. They’ll be looking to the more niche lenders, including smaller building societies. Lenders who offer a self-build mortgage product will often also carry a renovation mortgage as part of their range.

Ecology Building Society for example offers a renovation mortgage open to a wide range of properties, including derelict buildings. They will lend up to 90% of the purchase price in the first instance and then more throughout the renovation as the property value increases. They also offer discounts on interest rates for renovations that improve energy efficiency.

You should normally expect to pay slightly higher rates on these mortgages because the risk for the lender is higher. Once the project is complete though you should be able to switch for a cheaper conventional mortgage if you want to.

Eligibility criteria

You’ll probably find that most buy-to-renovate mortgages will be considered on a case by case basis as the specifics for each project will be so different, but there are still a few key eligibility criteria to keep in mind:

• Deposit – unlike a conventional mortgage where you can expect a 90% LTV (loan-to-value) as standard and sometimes even 95%, you should be prepared to put down around 25% as a deposit on a renovation mortgage. The higher deposit requirement reflects the higher risk for the lender.
• Credit history – whether you have any incidents of bad credit could impact your eligibility for a buy-to-renovate mortgage. Get a copy of your credit file, check for inaccuracies and be honest with your broker and lender about any credit issues.
• Development experience – lenders may take into consideration any previous property development experience and will also very likely look at whether you’re a first time buyer. If you are, you may need to approach a more specialist lender. Your broker can help you here.
• Property type – renovation projects are often older properties or non-standard construction, such as timber framed or concrete, which could limit the number of lenders willing to offer a mortgage, potentially increasing the deposit requirement or interest rate.

Alternative finance options

We’ve already talked about the possibility of a conventional mortgage, potentially alongside an additional loan, as an alternative to a buy-to-renovate mortgage, but are there any other ways to finance a renovation project?

One option is a bridging loan. This type of short-term finance provides a way to fund a purchase or project while you’re waiting for a chain of events to fall into place. In this case it could be to fund both the purchase and renovation costs until you’re able to apply for a conventional mortgage on completion of the works.

There are pros and cons to bridging loans. They are flexible and faster to arrange, and can be used in circumstances where you can’t get a mortgage, for example if the property you’re buying isn’t yet habitable. On the downside they’re usually more expensive.

Other things to consider

Property development is never straightforward, and renovation costs are renowned for being hard to keep in budget. Before you take the plunge, make sure you’ve considered all of the potential sticking points, including:

• Unexpected costs – most renovation projects end up going over budget, so be sure to build in a good contingency for unexpected costs. This could include general building works but also things like surveying costs, design fees and planning permissions.
• Insurance – standard home insurance may not cover a renovation project, so get advice from your broker and make sure you’re covered.
• Your own skills – be honest about your own abilities, both in terms of the actual DIY and project management. It can be a false economy to try and do things yourself that you’re not totally confident about and this can have cost implications.
• Planning permission – most smaller renovation projects won’t require it, but larger structural works may, and it’s a time-consuming process with results not always guaranteed.
• Timeframe – be realistic here and build in a good contingency as things normally take longer than you expect! Check for any limiting terms on your buy-to-renovate finance that could mean you incur penalties.