When seeking finance for home improvements, one of the key factors which decides what options you have available is whether the property is in a mortgageable state.
Lenders deem a property to be mortgageable when it is fit for someone to live in. This sounds more restrictive than it actually is because as long as someone has the basic necessities to live in the property then some lenders will find this acceptable.
For example the property should be weather and watertight and should have a working kitchen and bathroom – even if this just consists of a microwave, sink and toilet.
A property can be in an unmortgageable state from the outset. Alternatively it can be as a result of the project going over budget and more money is needed to complete the work but the property is in an unmortgageable state at the moment. Either way, there are options available to raise additional finance.
Mortgage or Remortgage
If the property isn’t in a mortgageable state, it is still possible to get a mortgage or a remortgage though options are very limited.
If you do get one, the lender will place a retention on it – meaning you will not get the full amount to begin with until the work is completed and it is in a mortgageable state. This means you will need to finance the necessary home improvements and the shortfall to cover the purchase or the remortgage.
However if you are purchasing the property and the mortgage lender has identified the property as unmortgageable, you can always use this to your advantage to try to get the sale price reduced.
Another alternative to getting a remortgage is to take out a second charge. A second charge home improvement loan basically means you are paying two mortgages off on your property at once. A second charge can be beneficial if your current mortgage has a great rate, or perhaps there is high early repayment charges.
Second charges also have more flexible criteria surrounding unmortgageable properties, with some lenders willing to lend if there is evidence of the applicants intention to live, or history of living, within the property they are improving.
Another option entirely is instead of using a standard mortgage to purchase the property, you can use a bridging loan. Bridging loans are short-term loans secured on your property that are commonly used to “bridge” the gap between property transactions. Usually those transactions are buying a new property and selling their old one, or looking to renovate a property to sell or refinance a mortgage.
For a bridging loan, the most important thing you need is the exit as lenders will be lending you a substantial sum of money with very short terms (commonly 1-2 years) so your exit will need to be reliable. For most people looking for home improvements the exit would be either refinance with a mortgage if you intend to live there or rent it out. If you are buying a property as a renovation project with the intention to sell then the sale of the property is the exit.
However you need to make sure the exit covers the entirety of the bridging loan.
Be warned rates are substantially higher (rates from 0.5% to 1.0% per month are not uncommon) than a remortgage so any delays in the project or falling behind schedule can be costly. Furthermore, lenders often add the interest payments to the initial loan amount and then charge interest on this figure as you are in effect borrowing the money for the interest payments. The benefit of this, however, is you don’t need to have the spare cash flow available to pay the interest each month.
Finally, bridging loans are used in a business setting by property developers and these loans do not need to be regulated by the Financial Conduct Authority so if you are not a business you need to ensure your lender is regulated by them to ensure you are protected.
Offering another property as security
This option isn’t available to everyone but if you own another property which is in a mortgageable state then it may be possible to secure finance on this property for the property that is unmortgageable.
You can remortgage this property or raise a second charge loan on it or use it as an exit as part of a bridging loan which maybe more straightforward than securing finance on the property which you are improving.
Personal Loan / Credit Card
If the improvements you need to make to your property to make it mortgageable are fairly minor and are comparatively cheap e.g. perhaps you just need to fit a basic kitchen with some appliances then it may be possible to do this on a personal loan or by taking advantage of a credit card with a 0% interest rate introductory period.
As these types of loans are unsecured they are comparatively more expensive to borrow (after any introductory discount) and a greater emphasis is placed on your credit history when applying. However, if you can complete the work and pay off the balance each month then it maybe an option. It is also worth noting credit cards do offer protection if goods are found to be sub-standard.
Peer To Peer Lending
A fairly new example of lending is Peer To Peer (known as P2P). P2P lending is similar to crowd funding where investors lend money to you online but unlike crowd funding you pay them back with interest which is then split between the investors in proportion to the amount of money they offered to begin with.
The main advantages are often the rate is fixed for the duration and it is fairly quick to get an approval. However you do have to pitch the idea to potential investors on the platforms and this area of lending is very much in its infancy so at the moment regulation is not quite as stringent or will protect you as much as it would borrowing through alternative channels.
Promise Money has over 30 years experience in underwriting complex secured loans. Talk to one of our underwriters on 01902 585020 to discuss your options.