Drew Wotherspoon, head of communcations, John Charcol
A recent conversation with a friend who is considering buying nothing short of a wreck led me to think about mortgages for property renovation, especially as these deals are destined to become more popular in the coming years. Property renovations can be broadly spilt into two types – first, a property that is habitable but needs a degree of modernisation and second, one that is a wreck. For a lender to regard a property as habitable the minimum requirement is that is has a usable kitchen – although this could be a sink and a microwave – a usable bathroom and a watertight roof. Habitable properties do not normally present any difficulty to lenders although if the mortgage valuation identifies serious problems such as a timber infestation or dodgy electrics the lender may impose a retention. This means that although it agrees to a mortgage it will deduct from the initial advance the amount the valuer estimates will be needed to put right the problem. Once it has been proved that the problem has been rectified the lender will advance the rest of the money. This may cause clients a cash flow problem. If they have not borrowed the full amount of money available to them, one way around this problem is to increase the amount of borrowing and then not ask for the retention which would be available. Of course, if the renovation is going to take several months it makes little sense to borrow the total amount needed upfront and leave cash sitting in the bank until needed. A flexible mortgage would be ideal for clients in these circumstances and an offset mortgage is the most convenient product type here because clients are only charged interest on the net amount borrowed. With an offset mortgage the funds that are not initially needed are placed in a savings or current account as interest is not charged on the difference. They can then be withdrawn as required for the renovation. If the property is not habitable mortgage choices are limited as most lenders don’t lend on such properties. But there are a few that offer mortgages designed for this situation. Lenders adopt a similar approach to funding a self-build and generally the total advance would be agreed on the basis of a valuation on completion of the renovation with the funds advanced in stages as the work progresses. Of course, the lender will also want to know that necessary planning permissions have been obtained. The number of stage payments varies according to the extent of the refurbishment but each time additional funds are required it will normally be necessary for a valuer to inspect the property to advise the lender of the value as it stands, and this will involve a fee each time. A lender will not normally advance more than a set percentage of the value of the property at any one time. Therefore anyone undertaking major refurbishment needs access to funds to spend on the property before they can effectively reimburse themselves by drawing down additional funds.