How to Finance Your Renovation

If you have found an old property in need of renovation, the chances are that you will need to borrow some money.

The majority of high street lenders will only offer a mortgage on a property that is already considered habitable — eliminating many renovation projects. If you want to buy a property that is derelict, in need of conversion, or otherwise not considered habitable, you will have to approach a specialist lender.

Finance for first-timers

If the property you want to buy is run down but habitable, most lenders will offer from 80- 95% of its value as it stands, but may withhold some funds – known as a retention – pending the completion of essential repairs. The property will be surveyed and the surveyor will indicate any work necessary. The property may have to be re-inspected before the balance of funds is released, for which there will be a fee. Typical works include damp-proofing, roof repairs, rewiring or repairs to central heating. Until the retention monies are released, repair works have to be funded by other means.

For properties that are not habitable, including conversions, the range of lenders willing to help is more limited. Those that will fund renovations or conversions (see table) will advance from 66-95% of the value of a property in its current condition, with further funds available in stages as the property is restored. The release of further funds will be triggered either by a re-inspection by the lender’s valuer, or upon production of an interim inspection certificate from a professional, such as an architect or surveyor.

The cost of starting renovation work, and keeping work progressing in between the release of stage payments, is typically funded through savings, loans, and credit from suppliers. An alternative is to use a specialist lender that offers stage payments in advance. The two leading specialists in this market are BuildStore and Advanced Flexible Self-build Mortgage.

High street banks may be willing to fund a renovation project on a commercial basis. They usually only advance limited funds: HSBC for instance will advance only 66% at any stage.

On completion, the renovated property can be re-mortgaged up to 95-100% of its market value. Re-financing on completion can release funds to repay other forms of borrowing.

What can I borrow?

The amount you can borrow is usually calculated by using a multiple of your income, or joint incomes. Many lenders will also assess your available disposable income after existing commitments and adjust the amount you can borrow accordingly. If you are self-employed and have two years’ accounts you will be treated in the same way as someone in fulltime employment. If you have less than two years’ accounts, or have difficulty proving all of your income then you will have to approach a lender that accepts self-certification of income. In this instance it may be worth approaching a broker to find the right lender. Some lenders will accept whatever income figure you claim if it can be backed up by bank statements; others may want a letter from your accountant.

If you have adverse credit history, find an advisor who can match your needs to a lender who can help. The same applies if the property you are renovating is very unusual. Ecology Building Society specialises in funding projects with green features, or buildings at risk.

How do I find a deposit?

Most renovators will be using a mortgage that advances between 66% and 95% of the market value of the property and so you will need to find funds for the remaining balance of the purchase price, purchase costs, survey and design fees and sufficient funding to get renovation work underway. In total you will typically need 15-20% of the total budget in cash to get the project off the ground. This deposit can be funded in a number of ways: from savings; from the sale of assets such as your current home; or by borrowing.

Re-mortgage: If you own your own home or another property, the most efficient way of borrowing the funds is to re-mortgage. Ensure you take into account any charges and penalties for repaying the advance if you reduce the loan or sell the property early.

Bridging Loan: If you have sufficient equity in your current home to fund the renovation, including the purchase, you have two options: to use a bridging loan, or re-mortgage. Remortgaging is typically cheaper than bridging finance, but you must have sufficient income to prove you can afford additional repayments — a bridging loan is easier to arrange than a mortgage or advance, especially for those with a modest income.

Personal Loan: If you do not own a property and have no savings or other assets, you will have to use personal loans for your deposit. This is a relatively expensive way to borrow, so ensure you choose a mortgage lender that offers the highest possible advance to minimise interest payments.

Some banks will provide borrowing via an extended overdraft facility. This is quite an expensive way to borrow — usually more expensive than a personal loan.

Credit cards are very expensive unless you repay the total outstanding amount monthly.

Accelerator Mortgage: Another way of borrowing at an affordable rate is to use a renovation mortgage product with an advance stage payment facility, such as the Ideal Home Renovation Mortgage from BuildStore. This allows you to borrow stage payments to fund renovation work in advance. Such products can improve your cash-flow position, although they can carry a considerable arrangement fee.

Funding an extension

If you already own the property you plan to renovate or extend, either increase your mortgage to release funds, or take out a home improvement loan.

Mortgage funding will usually be the cheapest option, but shop around for the best deal — switching mortgages can save money.

A home improvement loan secured against your home is the next cheapest option and may be easier to secure than a larger mortgage. The final option is a straightforward personal loan.

Borrowing Tips

ARRANGE FUNDING FIRST: Approach lenders before you start looking for a renovation — arranging finance can take weeks. Having funding in place, subject to valuation of the property, will mean that you can act quickly when you find the right opportunity.

SHOP AROUND: Approach several lenders to find the one that offers the best deal. This will be the lender that accepts your income status and offers generous multiples; the lender that will advance the highest percentage of the market value of the property as it stands. Take into account arrangement fees, the interest rate compared to the rest of the market and early repayment penalties.

KEEP YOUR OWN FUNDS AVAILABLE: Take out as much funding as is available to purchase the property and keep your own funds for the renovation work. This is more cost-effective than using stage payments which usually incur a revaluation fee and take time to arrange.

USE CREDIT FACILITIES: Extend free credit by taking out trade accounts, and arranging payment in arrears. BuildStore customers can apply for a TradeCard that gives them £15,000 credit for materials.

DON’T PAY TOO MUCH TAX: Some renovation work is eligible for VAT relief, especially on listed buildings, empty homes, conversions and properties where there is a change in the number of units.