Renovation has become popular in the past five years and is an area brokers are increasingly being asked about. This interest has been fuelled by the large number of house renovating programmes on TV as well as necessity.
The government has a target of 240,000 new homes to be constructed each year by 2016, but in 2007 only 160,000 were built compared with the formation of 223,000 households, according to the Department for Communities and Local Government.
These households need somewhere to live so many individuals are looking at bringing old, sub-standard or vacant houses back into use.
Fortunately, the government has recognised this need and recently made some concessions to renovators. In an attempt to cut bureaucracy, the Planning Reform Bill was introduced, taking many loft conversions and extensions out of the planning system.
It is now possible to create rooms in a loft space of 50 cubic metres without permission, provided the roof remains at its existing level.
Under the new rules, kit-chens and conservatories can also be extended by up to three metres in depth.
Under the old system, householders could either convert their lofts or extend the rear of their homes without permission, but not both.
Under the new system, the limit of 50 cubic metres for lofts will remain but other extensions will be allowed with no volume limit. This is a significant improvement on the previous situation.
The second change is aimed at individuals bringing vacant houses back into use. Since January 1, a VAT rate of 5% rather than 17.5% has been payable on the cost of works and materials used to renovate properties left empty for at least two years.
Previously, this discount only applied to properties that had been unoccupied for three years or more. This delivers significant tax-saving benefits to renovators.
These are welcome changes that will make renovating houses quicker and cheaper. But projects can only go ahead if the appropriate funding can be arranged and this is an area where brokers offer advantages over dealing direct with lenders.
Renovation projects are different from house purchases because borrowers need money to buy properties and then more to do them up. Project costs can make up a significant part of their borrowing so it’s important to ensure clients have cash available when they need it to fund ongoing work.
So for renovation projects, positive cash flow while work is in progress is paramount. As most builders will have at least two jobs on the go at the same time to ensure continuity for their workforce, any delay in paying them could result in them taking their squads off-site to concentrate on jobs which pay up.
This will not only delay projects while clients get the cash together to pay builders, but further delays could occur getting builders back on-site after they have started new jobs.
So how does the need for cash fit with how mortgages re-leased in stages for renovations work? Let’s take the example of a client looking to buy a rundown property for £130,000 and then spend £70,000 renovating it.
A renovation of this size would normally be split into four stages. These are first, stripping the property back and making structural repairs, second, getting building work done and making the property wind and watertight, third, doing the internal first fix of electrics, plumbing and plastering the rooms and fourth, second fix electrics, installation of kitchen and bathrooms plus decoration.
On a £70,000 project, this cost could be split into £20,000 for stage one, £20,000 for stage two, £15,000 for stage three and £15,000 for stage four.
There are two types of renovation mortgage, one where money for work is released once a stage has been finished, known as arrears stage payments. In the other, money is released at the start of each stage, known as advance stage payments.
Arrears stage payment mortgages typically release 75% or 85% to buy a property, so with one worth £130,000 a renovator would have to find a deposit of £19,500 to £32,500.
Once work starts on stripping back and making structural repairs, costs will have to be funded by renovators until the stage has been completed and interim valuations carried out for lenders.
Then, renovators will have to have access to cash of be-tween £39,500 and £52,500, in addition to what has been re-leased by lenders.
Once a stage has been valued, lenders will release money for that stage, bringing the cash requirement down, but it immediately starts to increase again as the next stage begins. This sort of mortgage can put a significant strain on renovators’ cash flow.
Advance stage payment mortgages aim to remove cash flow difficulties by releasing money before work starts on a stage rather after it has finished. They also provide higher borrowing during projects, with lending of 95% of the purchase price and the renovation costs.
In the above example, this means that on purchase, a deposit of only £6,500 would be required and a release of £19,000 would be made to the renovator before the first stage of work begins so the renovator would only have to find £1,000.
Once the stage is completed, a project supervisor completes a certificate, which triggers the release of money for the next stage.
So advance stage payment mortgages reduce cash input from renovators by the end of the first stage from £52,500 to £7,500, making renovation a more realistic proposition.