Financing your project – Property Renovation / Conversion:

 

There are two main types of funding available:

If you are in the first group, you are far better catered for than if you are in the second, in respect of the number of lending available to you.

One of the main stipulations for a mortgage lender to actually agree to lending on a property, under normal circumstances is that the property is “Habitable”.

This basically means that you should be able to move in, straight away and live in it.

It should be structurally sound, watertight, which generally means that the roof should not be leaking. It should have running water, whether that is “mains fed”, or from a pumped well,  and it should also should have at least a “working and safe” electrical supply.

It also means that there should be a “working kitchen” i.e. one that can be used for the day to day activities that you would expect any standard kitchen to allow the user to carry out, and a useable bathroom.

That’s all fine if you are buying a property to do a “cosmetic” renovation on, but not if it is basically a shell which you want to “gut” and completely renovate.

You might have come across the situation where you have been buying a property and the valuer picks up on something “negative” which is then mentioned in the report. – Often the lender will hold back part of the mortgage until that item is dealt with to their satisfaction. – Well, if you imagine the number of areas that a lender would “hold money” back on, on a property that needs “gutting” and almost fully re building, you can see that there is scope for them not to actually be happy to lend very much at all at the outset!

Thankfully, there are some lenders who WILL lend on the more major Conversion and Renovation projects.

I will give brief outlines of some of the  funding options for both types of projects:

The chances are that you will already have a mortgage on the property you are presently living in.

The first logical step if the property just needs anything from a “spit and polish” spruce up to a “substantial, but cosmetic renovation” (and you are going to need some funding to do the work), is to approach your present lender.

In some circumstanced, you may find that they can offer give you a “further release” if you have plenty of equity in your property and you are only talking about a small sum of money. – A valuer would normally do a basic valuation on your property (which you would have to pay for) and the funds may be given to you quickly and simply (Not all lenders offer this option).

Or, you may need to “re mortgage” the property to free up the funds you need (either with the same lender, or by going to a different lender who may offer “mortgage products” designed specifically for what you want to do.

If you approach your present lender and find that they have a suitable way to provide the funding you need ( either keeping your present mortgage or changing to another of their products) you may find that the fact that you are already “with them” should set you in good stead for you getting the extra funding agreed.

The project should increase the value of the property, usually by more than its co, so, in general it is a “sound” investment of the lenders funds. - Your present mortgage company will have a record of YOUR quality as a client. - So, as long as your history with them is reasonable, and your plans are sensible, you may find that they agree to your requests with the minimum of fuss and paperwork.

However, if for whatever reason you decide that a new lender is appropriate, then, you will find that there is normally a good selection of products to choose from.

Most mortgage lender will consider financing a property in “less than perfect condition”, with whatever “limited” conditions they feel they need to impose, so just have a look around at the best deals available.

Whichever route you go down for funding for a renovation that you presently own and live in, you should find that you have a good choice, so spend some time searching for the best product (see “conclusion).

This is where it can be a bit more of a “fight” to get the funding you need.

If you are buying a property which only needs cosmetic updating (maybe a new kitchen, bathroom, a “lick” of paint and a few repairs), you may be able to obtain pretty much any standard mortgage product. The lender may simply hold back a sum of money at the completion until you have completed the work and had it inspected by their valuer.

In one way this will give you greater flexibility when it comes to finding a good deal on a mortgage, but it will have the disadvantage that you will have to “temporarily finance” yourself,  the amount of money that they keep back when you complete. – This could mean you taking a personal loan out or using all your savings.

If you think you can get the work done quickly, then an overdraft at the bank might be an.

If, however the work needed on the property is more extensive, depending on your personal financial situation, you may possibly struggle to get the funding you need.

The reason is that there is quite a “high risk” in property renovation.

New build is fairly straight forward in most cases, as is “cosmetic renovation”, but there are so many factors which can go wrong in a major renovation, and so many unexpected “events” or “obstacles” which can leap up like a rake in the grass, that there a only a limited number of companies who have chosen to take the risk and specialize in providing funds.

For that reason the products they offer do usually not tend to be as competitive as standard mortgages.

Some companies, who provide funding to buy a property which needs major renovation, will agree to lend funds based on the property’s value when you buy it (e.g. you buy a house for £50,000 which needs 100,000 spending on it. – At completion it will be worth £200,000, but the lender will only actually lend, say 75% of the £50,000 purchase price).

They will then agree the mortgage for the completed property, but will not lend any further funds in between buying and completion. - In other words, you need the cash available at the outset, to do ALL the work. - Then your money will be reimbursed. This if fine if you are “cash rich”, but not so good otherwise.

 

There are now very limited numbers of lenders who will lend on renovation / conversion projects, on pretty much the same basis as they do for Self Build Mortgages. In other words they will allow you to borrow on the property and will then pay the balance of the mortgage in stages as you go through the project, - either in arrears, or in advance. – This option obviously makes a far more attractive proposition if you have been searching for funding for a major project but have hit nothing but obstacles.

Whichever type of mortgage you may think will suit you and you project, the two things i would say that you make sure you do are:

Set up and admin fees vary dramatically. - So do interest rates, “tie in terms” (which impose penalties if you pay off the mortgage within a certain time) and valuation fees, which can vary from “free” to hundreds of pounds. 

A few hours gathering information on different sources of suitable available funding for your project could well pay huge dividends in the long run.

Lenders also “change” their lending policies on a regular basis, depending on how they see the “overall” market at any given time.

So, if perhaps you looked into starting a project a year or so ago and, at that time, gathered together details of a few suitable product, - you would be advised to “bin them” and start again!

Make sure you know and are happy with the all the details of how and when any stage payments will be made.

Ask about the “flexibility” of the product to see if there is the option for you to slot in an extra “interim stage payment” if it should become needed. - The last thing you want is to get part way through your project (with weeks or even months to go before you can expect further funding), - and to find out that your cash is all used up!

It’s also worth trying to get your borrowing requirements, at least “in principle” sorted out PRIOR to finding a suitable property.

Some lenders have a system where you go to them and make an application, just as normal, BEFORE you start to look for property (or land).

Based on the information you give them, they may then agree to “lend in principle” a certain amount of money, based on your own personal financial situation, and subject to a valuation on the property you eventually want to buy. – This gives you the advantage when you view property, of saying to the seller “We are able to proceed straight away”. – This can then often help you to negotiate a better price.