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Dear Delia…

Dear Delia, My clients are looking to buy a rundown bungalow built in the 1930s with no kitchen or bathroom facilities. It also has substandard wiring and requires complete renovation to be habitable. They have a good deposit and funds for the renovations and the asking price is reasonable too. I’ve contacted my usual lenders but they all say no. Can you help?

Delia says: There’s a solution as Brian Murphy of Mortgage Advice Bureau and Jeremy Lofts of Astra Mortgages explain. Have you got a problem for Delia? Email mortgage.strategy@ Murphy is head of lending at Mortgage Advice BureauThis scenario does not give us much information about the clients’ personal circumstances so we have to make a few assumptions.

Intermediary response
Brian Murphy is head of lending at mortgage Advice Bureau
First, it’s unclear whether the clients intend to use the property to live in or as a buy-to-let. We also don’t know anything about their credit ratings or incomes.

But if we assume they’re purchasing the property as their main residence, all lenders would insist on 100% retention. This would mean they’d hold back the loan amount until the renovations were completed. As a result, the clients would need to arrange a bridging loan to finance the deal.

You say the clients have a good deposit and funds for the renovations, although it’s not apparent how much the property is going for and the LTV the deposit represents.

If they have at least a 30% deposit, it may be possible to arrange a closed bridging loan, whereby the clients can put a mortgage offer in place to repay the bridging cash after the renovations have been completed.

But they must put together a schedule of works for the renovations and ensure that the timescale is realistic and can be met. After all, if the renovation was completed early, interest would only be payable over the period the funds were outstanding. This could deliver savings, as some bridging facilities charge for a finite period even if borrowers repay their loans early.

Lenders including Link Lending can provide funding for up to 12 months and calculate interest on a daily basis. Dependent upon the LTV and provided that borrowing on the bridging facility remains below the lender’s maximum range, it may be possible to roll up interest as it accrues for up to six months.

If the clients are looking at a buy-to-let purchase, CHL Mortgages is an option. It offers a light refurbishment commercial buy-to-let deal at the Bank of England base rate plus 1.15%. The product carries an arrangement fee of 1.25% and an early repayment charge of 5% of the loan advanced until June 6 2009. This normally adds up to 85% of the purchase price or unimproved valuation.

The product is aimed at borrowers buying properties where no planning or building regulations are required. Typically the renovations involved are renewing bathrooms, kitchens and conducting complete redecorations, as is the case with this property.

Retention is held on the difference between the maximum loan – 85% of the purchase price or unimproved valuation – and the maximum loan available after the work is completed.

Lender response
Jeremy Lofts is regional business manager for Astra Mortgages
There are a number of buyers who due to rapidly increasing house prices over the past few years are keen to purchase bargain properties offering rapid capital growth. Most lenders view such deals as safe bets.

Not only are these properties offered cheaply but with quite a modest outlay for renovation work their value can be increased significantly.

But it’s not surprising that the lenders you’ve approached in this case said no. This type of property would not be considered as a suitable security.

If a lender was to issue a mortgage offer, it would probably be subject to 100% retention, pending completion of the renovation for the most important work.

This puts your clients in the classic chicken and egg scenario, which could only be avoided if they can provide the financing upfront for the purchase and the renovation work.

Ironically, when all the work has been completed, every lender in the land would be happy to lend on what would then be a low LTV proposition.

With this in mind, a bridging arrangement for your clients is possible but may prove costly for what would only be a short-term arrangement. After all, fitting a new kitchen and bathroom and tidying up the property could be completed in a few weeks.

It would be sensible to ensure your clients instruct a builder or other qualified person to survey the property before starting the renovations so that no structural problems are missed. A little investigation now could be invaluable by saving heartache and expense later.

Also, the applicants would be well advised to arrange quotes from different companies for renovation works in order to make sure the project is affordable. Sadly, clients can be overly optimistic with their calculations in this sort of scenario.

This is almost a mini-self-build or conversion project, so my advice would be to approach lenders that are experienced in these fields, although don’t be surprised if some of them don’t want to help.

If all else fails and you have no other options, I’m confident that one of the medium-sized, friendly building societies would take a sympathetic approach to the project and lend up to 85% LTV. It’s possible that some mutuals would even help fund the renovations.


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