Refurbishment Mortgages

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Refurbishment mortgages are a specialist type of finance ideal for a renovation or conversion opportunity – and can cover the purchase, plus the refurbishment costs.

Many conventional mortgage lenders steer clear of conversions because:

  • Uninhabitable properties don’t conform to residential mortgage requirements.
  • They often need to verify that the work will comply with building regulations.
  • It’s less straightforward to value the potential worth when it needs substantial modification.

Step forward refurbishment mortgages as a specialised borrowing product!

It’s possible that you might be better off with development finance, depending on the nature of the property and what you wish to do with it – for example, flipping a conversion, investing in a buy-to-let and refurbishing a permanent home are all different situations.

If you are looking to renovate a property you currently own, a remortgage for home improvements is another potential solution, provided you have sufficient equity in the property.

If in any doubt, please get in touch and we can discuss your plans and options in more detail. We can then advise on the most suitable type of refurbishment finance for your project.

How Do Refurbishment Mortgages Work?

Refurbishment finance is exactly what it sounds like – it is a mortgage against a property you intend to refurbish.

The exact refurbishment mortgage product you need depends on the scale of the refurb. A light refurbishment mortgage is best suited to minor redecorating and maybe a little structural work. Heavy refurbishment mortgages are appropriate for major renovations.

These mortgages usually release funding in two stages – part one when you buy the property, and part two when the work has finished, and there are several other features:

  • Refurbishment mortgages typically run for between 12 and 18 months.
  • Lenders will need to see a solid exit strategy to show how you’ll repay the loan.
  • You might have a finite end of term date (if you know when the refurbishment will complete) or an open loan where there is flexibility in terms of the repayment due date depending on progress.

Short-term refurbishment loans are a great alternative if you can’t get a standard mortgage on the property because you want to buy a project that doesn’t fall into the definition of ‘mortgageable’.

What is the Maximum I Can Borrow on a Refurbishment Mortgage?

Every applicant, property, and refurbishment plan will differ, so there is not a convenient calculation we can provide to show you how much you can borrow.

The lender will need to know:

  • What the property is worth now – or how much you expect to pay.
  • The cost of the refurbishment, including a contingency budget.
  • How much the home will be worth after the refurbishment.
  • Anticipated rental income if you expect to let the property out.

Refurbishment mortgage lenders will also assess other standard criteria, such as affordability and your credit score.

What Are the Differences Between Light and Heavy Refurbishment Mortgages?

Applying for the correct mortgage product to start with is the best way to secure the borrowing you need.

It’s not always obvious whether your plans constitute a light or heavy refurbishment, and the definition is slightly objective!

However, refurbishment mortgages tend to be split as:

  • Light refurbishments: Non-structural works such as redecorating, projects without planning permission requirements, and improvements that don’t need a building regulations inspection.
  • Heavy refurbishments: Any refurbishment where the costs are 15% or more of the property value. Projects involving planning permission and building regulation. Major structural changes include building an extension, altering supporting walls or making considerable adjustments to the property structure.

Light refurbishments could, for example, include installing new windows, fitting a new kitchen, or putting a new central heating system in place.

Situations Where a Refurbishment Mortgage May Not Be Suitable

Here at Think Plutus, we’re always quick to point out that there are hundreds of potential mortgages and borrowing options, so it is well worth considering alternatives and comparing products on a like-for-like basis.

There are also several situations where we would not recommend a refurbishment mortgage:

  • Auction purchases usually require a 10% upfront deposit, with the balance paid in 28 days. Refurbishment mortgages aren’t arranged this fast – a bridging loan would probably work better.
  • Properties worth under £50,000 are usually really tough to mortgage because the cost of the financing outweighs the profit the lender will earn through interest. In this case, we might look at short-term loans or a second charge loan depending on the specifics.
  • Full build projects, such as constructing a new property on the site, are better matched to either development finance or a self-build mortgage – a similar yet slightly different mortgage. A lender will fund development costs rather than those related to refurbishing an existing structure.

Renovation Mortgage Advice

Refurbishment is such a broad term. The variety of renovation financing options is also vast, so we recommend speaking to a whole-of-market broker before making big financial decisions.

Please get in touch with Think Plutus for further advice around the suitability of refurbishment mortgage for your planned works.

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