Raising finance on an unmortgageable property

The Daily Mail recently reported that homeowners in London borrowed on average almost £50,000 for home renovation.

It’s true that homeowners in recent years have favoured improving their current home over moving to another property. However, it is becoming much more difficult to budget for these home improvements and often the money raised may not be enough. For example, the renovations may have uncovered structural issues which the money raised has been used to fix but has left the property without a kitchen or bathroom and perhaps the borrower has had to move out.

As a rule of thumb, properties in this situation are usually seen as unmortgageable and many brokers prefer to take borrowers down the route of bridging finance and then refinance when the work has completed – the reason being bridging is often used by property developers so it is generally easier to get a property like this accepted as security.

However, there may be options available in the second charge market:

For any borrowers in this situation, they should first evaluate whether there is nothing they can immediately do regarding the lack of kitchen/bathroom facilities i.e. they may be able to set up a temporary kitchen/bathroom (i.e. a toilet, sink, running water and a microwave). This can affect the value of the property and thus the amount that can be borrowed but lenders may still consider the property for security for a second charge.

Yet, even if a temporary kitchen/bathroom can’t be fitted, some second charge lenders may still consider the loan, in particular if the renovations are clearly near completion and the property is secure and watertight.

However, if the borrower has moved into temporary accommodation and they are being charged rent, this may need to be considered in the affordability assessment. Also LTV will play an important role as if the LTV is very high, lenders may be too nervous to accept the application.

If they are accepted, there are some definite advantages of a refurbishment bridge – a bridging loan is a short term product and therefore has to be refinanced – often 18 months after the loan completes which can understandably be very stressful, especially when you’re already raising more cash for incomplete home improvements. Also a second charge will more likely be cheaper as rates are generally lower than bridging loans and some savings can be made on fees.

If you need more information then call 01902 585020 and one of our friendly advisers will be able to discuss with you in more detail.