A Guide to Buy-to-Renovate Mortgages

Fixer-upper properties can offer plenty of opportunities to homebuyers, whether you’re looking to flip a dilapidated property for a profit or hope to grab a bargain as a first-time buyer.

Yet you’ll need to get your finances sorted before you can start thinking about renovation plans, and with conventional mortgages not always an option, you’ll need to seek renovation mortgages instead.

This guide will tell you everything you need to know about them, including how to get one, what criteria you’ll need to meet and much more.

What is a renovation mortgage?

A renovation mortgage – sometimes known as a buy-to-renovate mortgage – is a kind of home loan specifically designed to fund your renovation project.

It can come in several different forms depending on your requirements and the extent of renovation required, whether it’s a light refurbishment (requiring non-structural improvements) or heavy refurbishment (where larger structural changes are needed).

Either way, if you’re looking to cover the cost of a fixer upper property, you’ve got a few options.

How do they work?

The process can vary depending on the type of mortgage you’re applying for, though you’ll typically need to start by getting the property valued in its current state, and from there will need to have an estimate of its proposed valuation once the works have been carried out.

You’ll then be offered an appropriate mortgage, with the finance often released in stages as the renovation progresses.

This means you may need to have your property re-inspected throughout the project. Then, depending on the mortgage type, you may be able to remortgage to a standard home loan once the works are complete.

Types available

These mortgages come in several different varieties and the one you should apply for will depend on the specific type of renovation work you’re planning…

Construction-to-permanent mortgages

This is a mortgage of two parts, initially offering you the funds to pay for the construction of your property – usually in the form of an interest-only mortgage – before converting into a standard mortgage once the build is complete.

Construction-only mortgage

A construction-only mortgage provides the funds to complete your build (or in this case, your renovation), and once you move in you’re offered a second mortgage that will pay back the original debt.

Can you get a renovation mortgage for an uninhabitable property?

Not usually, but this depends on the extend of the works needed. Mortgages for renovation are available on properties that are habitable – that is, they have a working kitchen and bathroom, are watertight and weather-proof.

You’ll be offered a mortgage based on the expected value of the property post-renovation, providing enough funds to complete the necessary works.

For properties in an uninhabitable state, your options are more limited, and you’ll likely need to find lenders offering self-build mortgages, which is best done through a specialist broker.

Conventional mortgage plus additional finance

Provided the property is habitable, you may be able to source a conventional mortgage but add on a loan to cover the cost of renovation at a later date.

This could be a secured loan (otherwise known as a second charge mortgage) or an unsecured/personal loan, depending on your needs and buyer profile.

Eligibility criteria

The specialist nature of buy-to-renovate mortgages means that eligibility criteria is often different to standard mortgage loans.

You’ll normally need to show that you have savings to cover some of the costs yourself, and you’ll often be subject to a “dual assessment” to make sure that the mortgage will be affordable both during the renovation and once it’s complete.

Deposit requirements

You’ll likely need a larger deposit than with a conventional mortgage, and/or will need to show evidence of your ability to pay for some of the works.

Maximum loan-to-values (LTVs) are typically around 75%, though this is by no means set in stone and depends on the lender.

Can first-time buyers be approved?

Yes, though the options will be more limited and you’re unlikely to find a first-time buyer renovation mortgage through a mainstream lender.

What if you have bad credit?

Yes, though it can be more difficult, and be prepared to pay higher interest rates and put down a bigger deposit. It may be worth spending time building up your credit score beforehand, and always work with a broker who knows the lenders that will accept adverse credit history.

Things to consider with home renovation mortgages

Getting a mortgage for house renovation certainly doesn’t come within the standard bracket of home finance, and there are a lot of additional things you may need to consider.

These include:

• Additional insurance, with most standard home insurance policies not able to cover renovation projects. A broker who specialises in these mortgages can also help you find the right insurance policy.
• Interest rates can be higher on renovation mortgages than with standard loans.
• Some lenders will only offer a mortgage based on the current value of the property, thereby requiring you to fund the renovation costs yourself.
• If you’ve got a stage payment mortgage – where the funds are released in stages – check whether they’ll be paid in advance or arrears. If it’s on an arrears basis (ie. the funds will only be released after you’ve completed the works at each stage), you’ll need suitable funds to cover the build costs beforehand.
• Be prepared for the additional costs that can come with a fixer-upper property, such as design fees, surveys and planning permits.
• Bear in mind that a lot of renovation projects can come in the non-standard construction category, which could further limit your mortgage options and make specialist advice even more vital.

It may seem daunting, but an expert advisor will go through all of these aspects with you so there aren’t any surprises later on.

Would a bridging loan be a better alternative?

An alternative to a renovation mortgage could be a bridging loan.

This is a form of short-term finance that can be suitable in a range of situations, such as:

• If you’re buying an uninhabitable property at auction
• If you’re looking to convert or renovate your residential property
• If you want to renovate a buy-to-let property
• Anyone other scenario where timing is of the essence or you don’t qualify for a mortgage in the short term

Bridging loans can be used to “bridge the gap” before you’re able to secure a conventional mortgage, and they always require a clear exit strategy. For example, if you’re buying a property at auction to flip and sell for a profit, you’d repay the loan once you’ve sold it.

Or, if you need bridging finance to fund renovations on your own home, you’d remortgage in the conventional way once the works were complete.

It could certainly be an option, but the specialist nature of bridging loans – along with all other forms of renovation finance – means seeking expert advice is key. That’s where we can help.

Get matched with an expert in renovation mortgages

We have a wealth of specialist brokers in our network, many of whom are experts in the field of renovation mortgages and know just where to look to find the perfect deal for your needs.

All you have to do is tell us your requirements and we’ll put you in touch with the broker we think is the perfect match – there’s no fee, no obligation and no hit to your credit score, just the chance to find the renovation mortgage that can help bring your project to life.

Get in touch today by calling us on 0808 189 0463 or make an enquiry, and we’ll set up a free, no-obligation chat between you and your ideal mortgage broker today.