Renovation Mortgage First-Time Buyer
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Renovation Mortgage First-Time Buyer
Adam Nunn and John Porter talk to us about first-time buyers and renovations.
What is a renovation mortgage? Can first-time buyers get a renovation mortgage?
If you’ve seen a property you like but it needs some work, it’s often best if it’s already habitable. You can buy it and put down your deposit, whether that’s 5% or 10%. If you already have some additional funds to renovate it, you can use a standard mortgage – which is very straightforward.
A renovation mortgage is different. This is designed for properties that are not habitable – which means they don’t have a working kitchen or bathroom.
On a property that requires extensive work, you may need to borrow against the overall end value of the property, rather than against the purchase price. Some renovation mortgage lenders will lend to first-time buyers in this situation.
What eligibility criteria do I need to meet to renovate a property as a first-time buyer?
There are two main parts to this. Obviously, there’s the financial side where you’re applying for the mortgage. As usual, you must fit the lender’s affordability assessment and criteria, and the same goes for the property.
But when you’re going through a renovation/build aspect, there are more key things for the lender to consider, including the construction type and whether you require planning permission.
Are funds payable upfront or can you pay after each stage of the build is completed? Lenders will want a full understanding of the building schedule and the costs involved.
Do you need a deposit for a renovation mortgage?
You do. All mortgage transactions require a deposit, typically, but the source of that deposit can vary. If you buy a property in need of a renovation mortgage, most lenders typically want a larger deposit – normally around 15%.
That’s because there is more risk involved in renovating. But a few lenders will go up to 95% of the property’s purchase price, only requiring a 5% deposit to purchase the property.
How do you fund a renovation? What other costs are involved?
Renovation can be funded from your own cash. You could just put down a smaller deposit and then use your own resources – or you can use a renovation mortgage. Here, you borrow against the future value of the property.
There are the standard costs when buying a home – such as stamp duty, solicitors, surveyors, broker fees and lender application fees.
On top of that are the build costs, obviously, but also potential planning costs, architect fees, site insurance and renovation warranties. If you make any changes to the electrics or gas, you’ve got to meet the regulations for those.
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Can I use some of my mortgage for renovations?
Let’s say you have £50,000 in the bank. On a standard mortgage, if you want to spend some of your money on renovating the property, you might choose to just put down a 5% deposit.
Perhaps the property price is £300,000. That means you’re putting down £15,000 and have £35,000 left over for the renovation.
You would choose a renovation mortgage if you don’t have that £35,000 to spare. You’re buying a property for £300,000 and putting down the 5% deposit, £15,000 – but that’s all your money gone. To complete the work, you would explain to the lender the work you’re going to do and what you believe the end value of that property to be.
Let’s say you’re going to do £50,000 worth of work. You’ll take a total mortgage of £335,000, but they let you borrow that against the end value of £400,000. You’re accessing funds you didn’t already have, by benefiting from the end value of the project.
Can I get a Buy to Let mortgage on a property that needs renovating as a first-time buyer?
Generally speaking, a Buy to Let has to be ready to let. That’s the key thing for the majority of lenders.
A few lenders offer light refurb products that allow you to replace the kitchen or bathroom. Normally there are timeframe restrictions, where the work needs to be completed within three to six months.
There is also potentially bridging finance. But for first-time buyers who are also first-time landlords AND there’s renovation involved, it becomes more difficult. There are potentially lenders that may consider it, but a lot more criteria will be involved.
How do I apply for a mortgage to renovate a property as a first-time buyer? What’s the process?
The process and assessment of finances is exactly the same as a standard mortgage. Where you’d utilise us is by coming in with the property you’ve had your offer accepted on.
We’ll identify if you have the funds to do it as a standard mortgage, and if it’s habitable. Assuming you have the funds and the property is in a bad state, but habitable, we would try to get a standard mortgage first. You’ve got the money to do the work, you just need the lender to be happy with the property.
If that property was deemed uninhabitable by a surveyor, that’s when we’d look at a renovation mortgage instead.
Are there any alternatives to a renovation mortgage?
Yes – potentially you can look at bridging finance, although for first-time buyers that can be more tricky. A lot depends on the level of renovation that’s required. The major drawback is you will usually have to put in a much larger deposit – perhaps 25% or even 30% as a minimum.
There’s lots of time constraints as you’re borrowing money for just six to 12 months, and the interest is more expensive – it starts mounting up very quickly. It’s an option, but it’s less likely you’d use that if there are renovation mortgage options.
Alternatively, a property might not have the ideal kitchen or bathroom and you might not want to live there, but if it is potentially habitable, you can do a standard mortgage and then do all the refurb that way.
You’ve demonstrated how a mortgage broker can help – any final thoughts on this?
You asked about whether a deposit is required, and a first-time buyer might be gifted money from a family member, or they might have inherited a property.
Ultimately, if you’re looking to do a project that needs such extensive work it won’t qualify for a standard mortgage, your deposit can come from the equity within the property you’ve been given or inherited.
Ideally, we’d get everyone a standard mortgage because the interest rates are lower. So talk to a broker – we’ll work out the most appropriate type of mortgage for your requirements. We’ll talk to some lenders before deciding whether to go down the renovation mortgage route.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.