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Renovation Mortgage

Short on funds to renovate your house? Here’s all you need to know about renovation mortgages, how they work and whether they are suitable for you or not!
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Opting to renovate your home instead of moving to a new place altogether can be a great option, both financially and practically.

In fact, about 77% of the UK population spent money on renovations and home improvement in 2021.

But if you’re thinking of performing an extensive makeover for your home, funding the project may present a few difficulties.

To avoid delays and making haphazard cost cuts to the renovation project, you can opt to get a renovation mortgage instead. 

These mortgages can be an excellent option for you to complete your dream project without sacrificing large chunks of your current funds and entirely depleting your savings.

What Is A Renovation Mortgage?

Renovation mortgages, otherwise known as buy-to-renovate mortgages, are designed specifically for people who need money to buy and renovate a newly purchased home. 

There is no single renovation mortgage to go for; rather, various types fulfil various needs, from small-scale makeovers to complete reconstructions.

Typically, lenders will provide a sum based on an estimate of the total renovation cost proposed to them. 

They will also factor in the current condition and value of your property if the refurbishment faces a setback.

After combining these values, you can expect a percentage of the total value as your buy-to-renovate mortgage. 

The money is usually sent in two phases: an initial advance that is a part of the total amount and the rest upon completion of the work.

For instance, a property worth £150,000 with a renovation cost of £30,000 puts its estimated net value at £180,000. 

You can receive £126,000 as the renovation mortgage for 70% of the total value, with the mortgage rate depending on your lender of choice.

As the initial advance for this example, you may receive £83,160, which can be used to handle some of the costs surrounding the renovation. 

The remaining £42,840 will be sent upon completion of the project and the lender’s satisfaction with the project, following which you can begin mortgage repayments.

Types Of Renovation Mortgages

Buy-to-renovate mortgages are broadly classified into two categories: light refurbishment mortgages and heavy refurbishment mortgages however, this can vary with lenders criteria.  

This categorisation is based on the extent of the renovation that must be performed on the newly purchased home.

1. Light Refurbishment Mortgages

Light refurbishment mortgages are meant to finance properties with relatively low refurbishment needs. These mortgages typically apply to renovations that don’t require permission or approval from the city council for renovations.

You can use a light refurbishment mortgage to fund the following modifications:

  • Adding a new kitchen or bathroom
  • Window installation
  • Electrical reworks
  • Redecorations
  • Central heating or cooling system installation
  • Modifications without structural alterations

Note that a light refurbishment mortgage can apply to multiple modifications at once as long as they don’t affect the structural integrity of your home.

2. Heavy Refurbishment Mortgages

A heavy refurbishment mortgage applies to properties that see extensive reworks to their very structure. 

Heavy refurbishments are typically highly extensive, requiring plenty of time and resources to finish completely. 

Of course, this necessitates that you receive planning permission from the city council to ensure that your plans adhere to the standard building safety regulations.

You can use heavy refurbishment mortgages for the following purposes:

  • Projects with extensive planning
  • Internal or external structural modifications
  • Property extensions
  • Property conversions

Like light refurbishment mortgages, you can use heavy refurbishment mortgages for a combination of the listed purposes.

Renovation Mortgages Rates

You can get a renovation mortgage potentially for a rate as low as 5% and increase it up to the desired fraction of the property value.

Usually, renovation mortgage rates cap out at 75% of the property value, with anything higher being a rarity. 

While it isn’t impossible to find a mortgage with a higher rate than 75%, you can expect a caveat like a high interest rate associated with it or very high lender fees.

For those who prefer to flip a property, renovation mortgages start at 0.6% and increase based on how extensive the repairs and refurbishments are. These mortgages share a few similarities with bridging loans, such as their relatively short-term nature.

As far as estimating the rate and fee of your preferred renovation mortgage, the biggest deciding factor is the extent of the renovation in most cases. 

Large-scale refurbishments will require a lot more money and resources, which may require the assistance of specialist lenders who may charge higher rates and fees.

Renovation Mortgage Eligibility Criteria

Like with any mortgage, there are a few eligibility criteria for you to remember while applying for a renovation mortgage. 

These criteria are generally similar to a standard mortgage, with additional requirements like development experience and construction type.

Before you apply for a refurbishment mortgage, consider checking the following eligibility criteria:

1. Deposit Requirement

Every mortgage, in almost all cases, needs a deposit upfront, and renovation mortgages are no different. Similarly to standard mortgages, you must pay 20% to 25% of the net property value.

Note that the deposit value directly affects a lender’s risk assessment of you as a borrower. The lower the deposit amount, the higher the risk they associate with you.

Of course, as the applicant, you may want to ensure that the required deposit amount is as small as possible. 

However, while it is possible to receive a mortgage with a lower deposit amount, expect the interest rate or monthly repayment to be relatively less favourable.

2. Credit History

An applicant’s credit history is one of the most important eligibility criteria for any lender to consider.

A credit score indicates an individual’s history of payments, denoted by a credit file score. 

A lower credit score means that their repayments have either been late or left unpaid entirely, making them untrustworthy from a lender’s perspective.

So, if an applicant has a low credit score, the chances of them receiving a renovation mortgage or bridging loan also decrease. 

Such applicants must either work on their credit score and bring it to a higher threshold or consult a specialist lender for a suitable deal.

3. Development Experience

If you have previously worked on a renovation project, the lender may consider you a low-risk applicant for a refurbishment mortgage. 

A higher level of experience makes it more likely for a lender to approve your application, while the opposite is also true. 

For first-time buyers, this can make getting your application approved quite difficult, requiring the help of a specialist lender instead.

4. Construction Type

Renovation projects that use standard construction materials like brick and mortar are approved for a loan more easily, particularly when compared to non-standard construction.

Getting a loan can become more difficult if your home includes elements like timber or steel frame and concrete walls. 

Moreover, the lenders willing to offer you a loan will require a higher deposit or interest rate, which can make the mortgage significantly pricier.

FAQ

1. Is it possible to get a buy-to-let mortgage for a refurbishment project?

Yes, a mortgage type known as a buy-to-let refurbishment mortgage is designed for this very purpose. However, a couple of stringent restrictions are in place, such as a six-month completion deadline and a light renovation plan requirement. As always lenders criteria will vary. 

2. What are the alternatives to a renovation mortgage?

One of the best options to seek instead of a renovation mortgage is a bridging loan, a flexible and easy-to-manage option for renovation projects. It is a short-term loan that bridges the wait between planning a project and starting work on it.

Final Words

Renovation mortgages may be a simple and effective way of tackling an extensive refurbishment of your home without having to worry about financial management, such as using all of your initial capital for the project.

With the day-to-day expense management taken care of by the mortgage, you can channel your focus into redeveloping the house instead. This makes them a highly convenient option over alternatives like bridging loans, which only help you in the short term.

Whether you choose light or heavy refurbishment loans, simply getting one can be the important first step in making the home of your dreams.

Support from an experienced broker could prove essential in getting your refurbishment project over the line.

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.

CeMAP & CERER Qualified Mortgage Adviser

I am CeMAP & CERER qualified mortgage adviser and have helped a number of clients realise their dreams when they thought it would not be possible. I’m skilled at getting mortgages sorted for people with a history of missed payments, CCJs, defaults, debt management programmes, IVAs and bankruptcies.

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