Purchasing a property can be one of the most reliable ways to make a return on your investment whether that’s a quick sale after refurbishing a property or in the long term with gradual increases in property prices.
Also, if you intend to use the property for commercial purposes, you can generate an income from owning the property.
But what if the property you own is an old, dilapidated building that has become too dangerous to use?
Well, in that case, you may be eligible for a refurbishment mortgage to renovate the property before either living there or selling it.
If you are relatively inexperienced with property investment, though, you may not know what a refurbishment mortgage is.
In this guide we will discuss the things to consider and what to look out for with a refurbishment mortgage.
Table of Contents
What Is A Refurbishment Mortgage?
A refurbishment mortgage, alternatively known as a renovation mortgage or refurbishment finance, is a loan that can be used for fixing or renovating a property. It is a highly beneficial tool for property investors looking to upgrade or “flip” old properties.
This type of mortgage can also prove useful for individuals looking to invest in commercial property. With it, they can upgrade and convert an old, non-commercial building into a commercial property, which will hopefully provide a return on your investment.
A refurbishment mortgage can be used to finance the purchase and the renovation work to get the property up to scratch.
How Does A Refurbishment Mortgage Work?
Refurbishment mortgages are usually short-term loans that require well-planned repayment strategies. In order to approve the loan, the lender will require you to specify this strategy, which helps to reduce financial risks.
Once the mortgage is approved, the lender releases the funds quickly so that you can complete the renovation process as soon as possible. The money is often provided in two stages to reduce the lender’s risk.
The first phase of funding is provided when you purchase the property, and it is a percentage of the building’s purchase price. Subsequently, the second stage of funding is provided once the renovations are complete.
The amount of money you can borrow is generally based on the expected value of the property once all the renovations are done.
For instance, let’s say you purchased an old property for £200,000, and the money required for renovation is £50,000.
This means that the total investment required will be £250,000. However, the mortgage amount that you can borrow won’t be based on this figure.
The price of the renovated property will naturally increase after the renovations. So, if the projected property value of the house goes up to £300,000, then you can borrow an amount that is based on this value.
In other words, you may be able to borrow around £225,000 in this example, which is 75% of the expected figure.
Types Of Refurbishment Finances
It is important to note that refurbishment mortgages are typically categorised according to the scale of the renovations.
Broadly speaking, there are two categories, which are light refurbishment finances and heavy refurbishment finances.
A. Light Refurbishment Mortgage
Light refurbishment mortgages are used when the renovation work required is fairly small. In other words, if you are planning to undertake “light” upgrades for the property, then this will more than likely be the choice you will go for.
Usually, light renovations consist of simple tasks that don’t require building regulations or planning permissions to undertake.
Below, we have mentioned some examples of light renovation tasks that can use this mortgage:
- Installing new doors and windows
- Rewiring the electrical system of the house
- Setting up a new room, such as a bathroom or kitchen
- Undertaking general redecoration and repainting tasks
- Installing new heating or HVAC systems
As you can see from the above list, most of the light renovation tasks aim to change the overall aesthetic of the house or make optional improvements.
Naturally, they may not cost as much as the more heavy refurbishment work, which means that the amount you can borrow with a light refurbishment finance can be relatively limited.
B. Heavy Refurbishment Mortgage
A heavy refurbishment mortgage is used when the renovation work required is larger.
In most cases, undertaking these “heavy” refurbishment tasks will require you to make considerable structural changes to the building. As such, you will need to get planning permissions before beginning such tasks.
Examples of heavy renovations include:
- Building property extensions
- Converting an existing property
- Altering the internal or external structural foundations of the building
- Demolishing a part or the entirety of the property
Due to the nature of the above tasks, the renovation project may take longer to complete. So, heavy refurbishment finance takes into account the time factor, which increases the complexity of this mortgage type.
Refurbishment Mortgage Eligibility Criteria
1. Deposit
In the case of standard residential mortgages, you can pay as low as a 5% deposit. Since the risk to the lender is greater with a refurbishment mortgage, they will usually require more security and a larger deposit in order to consider such a mortgage.
So you can expect to pay an initial deposit of around 25%-30% to be considered.
2. Credit History
A good credit history is one of the main factors to consider when looking at any loan, including refurbishment mortgages.
If you have a bad credit history, this could affect your chances of obtaining a mortgage. Whilst it’s not impossible to get a mortgage with bad credit, it does reduce your chances as less lenders may be willing to offer a mortgage in those circumstances.
You can improve your credit score by clearing your outstanding loans and debts on time.
3. Development Experience
If you are an experienced property investor, then the lender may take your development experience into account which may help during the application process.
Experience is not always necessary as long as you meet the lenders criteria for such a loan.
How To Get A Refurbished Mortgage?
The process for getting a refurbishment mortgage is not too dissimilar from the procedure followed for any other standard mortgage. For your convenience, we have discussed this process below.
Step 1: Gather Your Documents
First, you need to gather all the relevant documents required for the mortgage. This includes bank statements, proof of income, updated credit reports, valid identification and proof of address.
Step 2: Arrange Funding For The Mortgage
Once you have gathered all the documents, you will need to arrange the funds for the refurbishment mortgage.
In order to do this, you have to prepare a budget for the renovation and research the costs of the refurbishment. It is a good idea to seek help from a financial advisor or broker to accomplish this step.
Step 3: Research Different Mortgage Lenders
Now, you will need to do some research on the different lenders available on the market. You need to find a suitable lender who meets all your requirements and provides a good degree of flexibility.
Contacting a specialist mortgage advisor at this step is advisable as they will have the knowledge of each lenders criteria and will be able to find you the best possible solution for your circumstances.
Conclusion
We hope that the information here has helped clear your concerns regarding refurbishment mortgages. So, if you’re looking to renovate your dream home in the perfect area then a refurbishment mortgage could be your ticket to do that.
Get in touch with one of our specialist brokers and they will be able to guide you through the whole process and make your dream a reality.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.
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