How To Get A Renovation Mortgage
Home owners and developers should choose the finance for their renovation projects as carefully as they choose the design, their builder, the materials, fixtures and finishes.
A finance package that’s too expensive or inflexible will be a frustrating constraint upon your plans, and can have a severe impact on your profit margins.
And without access to the most appropriate specialist finance, your project may not make it to preliminary sketch plans.
What is a renovation mortgage?
If you’re buying a property that needs more than a quick lick of paint and perhaps a wall knocked-through, you may not be able to use standard mortgage finance.
The type of finance that suits you will depend on:
- whether this is a property you already own
- the type of work that needs to be done
Suitable borrowing you need could be referred to as a renovation loan, a home improvement mortgage or loan, a refurbishment loan, or bridging finance (also known as a bridging loan).
A short-term loan rather than a mortgage?
Strictly speaking, finance for improvement works that are going to significantly increase the value of a property would be a renovation loan rather than a mortgage.
The distinction is that this would be short-term finance rather than borrowing arranged over the 20 to 25-year time-span of a mortgage. And that’s useful to you because the uplift in value should result in an improved loan to value (LTV) ratio, which gives you access to cheaper borrowing as soon as the work is completed - without paying the early repayment penalty charges which standard mortgage finance would incur.
Why is the interest on bridging finance deferred?
Short-term borrowing is always going to be more expensive month-by-month than long-term finance. But with a bridging loan (or bridge finance), borrowers have the option to have the monthly interest payments “rolled up” into the total amount of the loan, to be repaid at the end of the agreed loan period.
On a regulated bridging loan, which is secured against a borrower’s personal home, the Financial Conduct Authrority’s regulations require that the interest payments should always be rolled-up.
The presumption is that a homeowner is already paying monthly mortgage payments (since bridging finance is secured against a property already owned), so it would be a stretch to afford additional monthly borrowing costs.
Rolled-up interest reduces the amount of funding available to spend on building works (since the maximum loan amount must include the compounded interest costs), but it allows borrowers to keep their monthly outgoings as low as possible, freeing-up spare cash for the ongoing cost of the renovations.
Depending on the type of renovation project you’re planning, this may be the only type of finance that’s available to you (see below).
And a good mortgage advisor should be able to demonstrate that the advantages of being able to refinance early, with an enhanced LTV which gives you access to mortgages at cheaper rates than you would previously have been offered, offsets the higher short-term costs.
What kind of funding can you use for your renovation?
The borrowing you can access naturally depends on your credit-worthiness and ability to repay – though there are forms of finance which are available to borrowers with imperfect credit records because they’re secured against the value of another property rather than your income.
The four key factors to be considered when deciding where to look for your finance are:
- How much money do you need to borrow?
- Do you already own the property, or are you buying it – at auction, or on the open market?
- How quickly do you need the finance
- Is the property defined as “habitable” – ie does it currently have a working kitchen and bathroom
Is the property in "habitable condition"?
Most high street banks and building societies won’t offer a mortgage on a property that is
- Derelict (empty, run-down, boarded-up)
- In need of conversion
- Not in habitable condition (it doesn’t have a working kitchen or bathroom)
For example, a new-build property would be considered uninhabitable if it has come onto the market as a forced sale because the developer has run out of finance and it doesn’t have a finished, usable kitchen.
You also need to be aware that a property’s value may be substantially reduced while building works are in progress
No matter how glamorous the final result will be, a home that has had its entire rear wall removed and the garden turned into a building site in order to add on a two-storey Grand Designs extension, will be worth less – for a time – than its original mortgaged value. And that’s not a situation that any lender wants to find themselves in.
How quickly do you need finance?
Prime properties for renovation don’t generally sit on the market for long, because the profit margins are so appealing: builder-developers and wannabe doer-uppers hoping to get onto the property ladder for the first time may be circling: a vendor will be inclined to accept the first offer with finance settled.
Many of the most promising properties for renovation are sold at auction: final and complete settlement is usually required within 28 days of hammer-fall, which is sooner than conventional mortgage finance can be arranged.
Your renovation finance options
1. Take out a personal loan
You can approach your own bank (or any lender) for a personal loan. This would be “unsecured” lending - that is, it’s not tied to the value of an asset. That’s less risky for you, but may make the rates more expensive than for a secured loan.
Applications can usually be done online, and same-day approvals may be possible.
Disadvantages of an unsecured loan
- The maximum you can borrow is usually around £25K
- Borrowing terms are usually up to five years – which may be too soon for you pay back the whole loan amount
2. Extend your current mortgage
If you’re looking at doing a major renovation to your own home, or a rental property you already own (for example, you’re building an extension), the most straightforward way of accessing the additional funding you need might be to apply to for a "further advance" on extend your current mortgage.
Your lender’s willingness to add on this additional borrowing will depend on:
- And up to date payslip and whether you can afford this additional borrowing
- How much the proposed works will add to the value of the property
- How much equity you have in your home (that is, how much leeway you have within your currently-agreed LTV)
- = an additional £25K of borrowing on an £800K mortgage will probably be acceptable; an additional £25K on top of a £140K mortgage might not be
A further advance can be quite quick to arrange: days rather than weeks.
Disadvantages of extending your current mortgage
- The arrangement fee could be several thousands of pounds.
- This additional borrowing will be repaid over the lifetime of your mortgage, which ends up costing you more in the long run.
- If your mortgage is currently on a historically low rate, and your mortgage lender won’t let you add on this additional borrowing to the same rate but rearranges the whole borrowing at their current rate, you could lose out substantially. You’ll not only be paying for this additional borrowing at a higher rate, but the whole amount of your original mortgage as well.
3. Take out a secured loan
Also known as homeowner loan or a second-charge mortgage, this is borrowing that’s “secured” for the lender against the value of a property you own. It’s a mortgage that “sits behind” the primary mortgage on a property.
A second-charge mortgage is arranged with a separate lender to your primary mortgage lender (but with their permission), so it doesn’t affect your primary mortgage rate.
It’s repaid over a similar mortgage term, which keeps the monthly repayment costs low - but that does increase the overall cost of the borrowing to you over the lifetime of the borrowing.
Application fees are very low, and under 60% LTV a valuation isn’t required so a second charge can be arranged as quickly as in a week.
Disadvantages of a secured loan
- The interest rate will be higher, reflecting the risk to the lender, who will be second in line for repayment in case of difficulty.
- This is a riskier type of borrowing for you: your house is at risk if you’re not able to repay.
4. Take out a bridging loan
If you have sufficient equity in a home or investment property you already own, you could arrange a bridging loan to “bridge” a gap in funding, which is secured against the value of that property.
Every bridging loan needs to have a clearly defined exit strategy for repaying the total sum borrowed: usually the sale of a property, or refinancing on a mortgage. (So if you don’t intend to sell the property, the increase in value resulting from the renovations must be sufficient to repay the whole loan, plus interest.)
Advantages of bridge finance
Approvals depend chiefly on a straightforward valuation of the property being offered as security for the loan, rather than an assessment of the borrower’s earnings and credit-worthiness. So short-term bridging finance can be arranged quickly – within a matter of weeks, and occasionally literally within a week.
Bridging loans can be used for:
- Buying property at auction, and the cost of renovations
- Self-build projects
- Residential property conversions
- Commercial and buy-to-let renovation projects
Bridge finance can usually be repaid any time after a month’s duration, and you only pay (by the day) for the amount of time you’ve had the loan.
Higher loan to value
Bridging loan lenders may be prepared to provide up to 80% of the LTV depending on your personal circumstances. This can save you from using your own capital or having to approach another lender for the shortfall in funding.
Disadvantages of bridging finance
- Set-up and admin fees, and interest rates, can be high (though you can repay early without penalty charges)
What type of bridging finance do you need?
Is your project defined as a light or a heavy renovation?
Light renovation or refurbishment bridging loan...
Light refurbishment loans are more suitable for smaller projects where:
- No planning permission is required
- Building regulations do not apply
- There’s no change to the nature of the premises (you’re not converting a small hotel into student accommodation, for example)
Heavy renovation or refurbishment bridging loan...
You will require a heavy refurbishment loan when:
- Structural amendments are required
- Planning permission is needed
- Building regulations apply
- The development costs more than 15% of the property’s value
Why traditional lenders probably can’t help you with renovation finance
Many home renovators and first-time developers make their first approach for finance to their own bank, or another high-street bank or building society. But for a variety of reasons, these are seldom the most suitable sources of finance for renovation projects.
Unsympathetic to inexperienced applicants: high-street lenders operate to strictly defined lending criteria. Applicants who don’t have the required building / development experience are unlikely to be given the green light.
Picky about properties: traditional lenders’ definitions of properties they classify as unmortgageable include):
- Anywhere valued at less than £50,000
- Properties with structural issues (problems with foundations, load-bearing walls, roof framing etc)
- Properties that are derelict or without a functioning bathroom or kitchen
Lack of urgency: conventional high street mortgage applications can take up to three months to be approved; more complex renovation projects are even more of a challenge for their underwriters.
Advantages of bridging finance from specialist lenders
Specialist lenders (private banks and independent finance groups) take a bespoke approach to their lending decisions. They’re able to consider each application on its merits, and if it doesn’t meet their criteria in one area they may be persuaded that other factors are more favourable.
This sort of flexibility works well for borrowers with particular non-standard financial circumstances, or unusual project set-ups. But it doesn’t work well on templated price comparison sites.
As a result, many specialist lenders can only be approached through broker intermediaries, who can be expected to have a detailed knowledge of the variety of finance products across the whole property finance market.
They’re able to recommend to clients the lenders which are most likely to approve their applications and offer the most favourable terms, saving money and time on arranging lending.
Clifton Private Finance’s bridging loan service
We work with bridging loan lenders who are prepared to provide the following:
- Market leading bridging loans for renovations from £50,000 to £25M
- Rates from 0.44% pm
- Lower rates for £1M+ loans
- £99 valuation fee option for properties up to £1 million
- Terms from 3 months to 3 years
- Loan to Value (LTV) of up to 80% (can be more if other assets in the background)
Pre-application checklist: how much finance will you need for your renovation project?
Use our checklist to identify the key costs of your project and get a clearer idea of the finance you’ll need:
1. Market research
A step that's commonly overlooked by first-time renovator-developers is the need for rigorous research before you get started, to determine whether there is demand within this particular area for property of the standard you intend to achieve.
Owner-occupiers may enjoy the benefits of their renovations for many years to come, and can hope to recoup the cost of their addtional investment if the area gentrifies around them and similar properties drive up surrounding values.
But being the best-house-in-the-worst-street is not the situation you want to find yourself in when you come to sell.
When looking at local property values, don't just ask estate agents: check the prices on directly comparable properties (in the same school catchment area / distance from amenities / south-facing garden etc) achieved at sale.
2. How much will you need to buy the property?
If you’re purchasing a property to renovate and sell, on most lenders will want you to put at least 25% of your own money into the deal.
For commercial property you may have to pay VAT on top of the purchase price (in 2019: 20%).
Not every property is subject to VAT. As a general rule, the tax is usually payable on new commercial property sold as a freehold, but not on for the majority of other property. But it’s important to double-check this before committing to purchase.
3. How much will planning permission cost?
If you’re planning to undertake the kind of works that will add significant value (an extension, a loft conversion, digging out a basement…) it’s likely they will require planning permission.
Costs involved in obtaining planning permission
- statutory application fees (£206, to £462 per 0.1 hectares)
- council charges (including pre-application costs)
- Community Infrastructure Levy (CIL)
- site survey fees (£600-£1,500)
Professional fees (largest cost in a planning budget)
- architect / architectural technician / building surveyor / draughtsman (pre-application sketches and detailed drawings, plus any amendments: calculated as a percentage of the overall build price – from £300 to £15,000)
- planning consultant (pre-app advice: £300-£1,000; planning application: £750-£2,000; planning appeal: £1,000-£3,000)
- land surveyor
- structural surveyor
- arboriculturist (£300-£1,000); ecologist (Phase 1: £600-£1,200); drainage / highways archaeological / environmental assessments (£600-£1,500 each)
Check whether quoted fees include VAT and expenses
4. Unforeseen costs
You will calculate the most obvious project costs:
- purchase price
- design and planning application
- contractor costs
- project management costs
- materials, fixtures and fittings
- cost of finance
You then need to budget for delays and unforeseen costs which can drive up the cost of even the best-managed projects. Experienced developers advise adding at least a 10% as contingency costs.
Calculate the cost of your renovation finance
Finance Rates from 1 - 18 months Rates up to 80% LTV As at 21st June 2019 Finance Rates from Up to 30 months Rates up to 70% of GDV As at 21st June 2019 Finance Rates from 1 to 18 months Rates up to 75% LTV As at 21st June 2019
Buying, Renovating & Selling (or Letting)
Ground Up Development
Refinance & Exit Finance
Finance Rates from
1 - 18 months
Rates up to 80% LTV
As at 21st June 2019
Finance Rates from
Up to 30 months
Rates up to 70% of GDV
As at 21st June 2019
Finance Rates from
1 to 18 months
Rates up to 75% LTV
As at 21st June 2019
Contact Clifton Private Finance to discuss finance for your renovation
No two property renovation projects are the same, so it pays to have finance that works for your particular circumstances and building plans. It’s easy for renovations to run over time and budget, at which point the cost of your finance becomes a critical success factor.
We’re experienced in advising on the type of finance most suitable for a wide variety of renovation projects. Call us any time to arrange a suitable time to discuss your plans: