Property renovation Doing up a dump
Dream of renovating or building your own home? Olly Morrison
looks at how you go about funding such an enterprise
Budding self-builders and renovators are often pleasantly surprised by the
number of mortgage
lenders out there offering them home loans to help finance projects. But the
difficulty with these deals is borrowers will most likely need to fork out much
of the initial costs for their work upfront, which can come as a bit of a shock.
Not all lenders allow the funds to purchase the land that you hope to build on,
for instance. Renovators should watch out as a mortgage lender won’t grant you
any funds if you buy a home that turns out to be structurally unsound.
Dilapidated or out-of-date homes, of which there are many on offer at auctions,
are also a risk.
Lenders generally won’t lend on properties without working
kitchens and bathrooms in place, for instance. Not because they want to come
round for dinner but because they don’t want the bother, should it be
repossessed, of being lumbered with a squalid house themselves that they might
have difficulty selling. They might hold back lending until repairs or
renovation work is completed -possibly a problem considering the 28 day time
scale. That’s why it’s a good idea getting the valuation done, perhaps a home
buyer’s report also, before you buy anywhere. This way you won’t risk the agony
of surrendering your deposit should your lender kick up a fuss about the
funding. It’s also worth approaching a lender that can guarantee you a quick
turnaround in terms of the valuation. Banks and building societies that employ
independent surveyors tend to be quicker than ones that use in-house teams.
Those that do allow the funds to purchase the land that you hope to build on
typically lend up to 75 per cent of the the cost of the plot (providing you have
outline planning permission). But they won’t immediately allow you the funds you
need to actually build your bespoke pad. They typically grant 65-95 per cent of
the costs but only after certain stages of the building work are complete.
Self-builders, therefore, usually end up selling an existing home if they are to
be able to afford to kick-start their exciting venture. A lot of people like the
idea of self build or renovating a cheap property, says David Hollingworth from
the mortgage broker London and Country, “but you do tend to need capital before
you start and people are not always prepared to sell their home and rent or live
in a caravan onsite.” An alternative might be to
remortgage an existing property.
This is risky, though. It may pay for a plot of land but is unlikely to cover
the costs of building an entire home. So you’ll need to be able to prove to a
lender you can afford two mortgages. If you can’t, finding the finances will be
an uphill struggle. Bridging loans are an option, but a flawed one. These are
short-term loans similar to mortgages as they are secured against a home. But
they are considerably more expensive. A more popular alternative against selling
up and slumming it or living with the in-laws is the specialist self build
lender Buildstore. Its unique selling point is that it lets you borrow up to 95
per cent of your building costs upfront, as well as 95 per cent of the cost of
the plot of land. The slight catch, though, is that you’ll be required to take
out indemnity insurance to cover the lender in case you don't complete your self
build venture. The cost of this varies between £260 - to over a £1,000.
Buildstore says most customers are set back between £500 - £700.
If you get your funds via the Buildstore you will get a mortgage deal with one
of the four lenders it works with. These providers won’t, though, unlike others
such as Nationwide and Norwich and Peterborough, allow you to pick a deal from
its entire range of home loan deals. Lloyds TSB offers just one five-year
tracker deal with an interest rate set at 0.39 per cent above the Bank of
England base rate (currently 4.5) per cent). Borrowers with The Mortgage
Business will be put on the same rates as
buy-to-let borrowers (therefore
slightly higher): respectively a tracker set at 1.79 per cent above base rates
and a three-year discount offering a current interest rate of 5.59 per cent.
Skipton Building Society, meanwhile, allows the customers it takes via
Buildstore to choose any of its intermediary products, so still not quite the
range it offers conventional borrowers.
You’re also limited with other self build specialists such as the Ecology
Building Society. This firm is geared to helping self build borrowers who are
keen to be environmentally friendly. Ecology’s customers are put straight onto
its standard variable interest rate (SVR) - currently 6.3 per cent. Only after
two years do borrowers qualify for a 0.25 per cent discount. Redemption
penalties, set at three months worth of interest, also apply in the first four
years of the deal. While many other lenders out there will give self-builders
the choice of an entire mortgage range, many will still insist you pay the SVR
while the building work is going ahead. Only when your self build is complete
will you be able to enjoy one of its more competitive deals, as you would if you
were a more standard mortgage seeker. To limit your out goings during a period
when you are already on a tight budget, though, many will only charge you on an
interest-only basis while you’re constructing a home. Income multiples,
meanwhile, are lower compared to conventional deals across the board. Providers
usually lend a maximum of up to three times income where there is just one
person paying the mortgage. For couples they may lend up to two and a half times
the joint income. Finally, the type of deal you get and loan amount depends on
the nature of your plans and flexibility of the lender. Expect to be treated
better with detailed planning permission, design specification in place,
including budget and timetable.
case study 1
Ed Sykes renovated a dilapidated property in London and was inspired to launch a
website to help people find run-down properties. He now runs the website
www.pickupaproperty.com, which alerts subscribers to properties for sale in need
of renovation. He explains he found it frustrating trying to find properties for
sale. Many renovators find properties at auctions, but the process can be a
little daunting for novices. If your bid is successful, for example, you’ll
immediately have to fork out a deposit of ten per cent the value of the
property. You’ll then have just 28 days to complete the purchase.
Ed eventually found a property through an estate agent in the Clapham/Brixton
area of the capital and bought it with his architect brother for £275,000.
Together they spend £80,000 doing it up over a period of about three years. The
four-bed terrace house was recently valued at £450,000.
“The property hadn’t been decorated for 30 years and there was no central
heating,” explains Ed, who quit his job as a lawyer to run the website. The
brother funded the project as they went and did most of the work themselves. If
they would have did the work solidly would have taken them around three months,
estimates Ed. “You’ll need a contingency fund of
around 10 per cent as the golden rule is that you always overspend,” he says.
“You also need a lot of perseverance.” “We were not extravagant, but
however much you budget there’s always things that come along an bite you in the
bum.” Ed unearthed damp problems and had to rip out the property’s floors.
“It’s hard, dull, unhealthy work and the amount of dust is phenomenal.” He adds
if he did it again he wouldn’t live in the property. The brothers were without
water for six months and eventually decided to rent alternative accommodation
until the project was complete. “I’d also try and be more dispassionate about it
as you can’t afford to get emotionally involved.”
The typical stages that the lenders work to, nb some are more flexible than
others;
stage one: 15 per cent when property is damp proof
stage two: 15 per cent when first floor built
stage three: 15 per cent at wall plate level
stage four: 20 per cent when the roof is on
stage five: 15 per cent when the property is plastered internally
stage six: 20 per cent when build is finally complete
Buildstore lends before the stages are complete. Here are the stages it roughly
works by;
stage one: foundations in place
stage two: shell of house erected
stage three: when the property is wind and water tight (ie has a roof)
stage four: pipes, wiring and plastering finished first fix stage five: when
the house is finished
20,000 people build their own homes every year. Here’s a few reasons why;
-a home where you want and how you want
-self-builders avoid stamp duty and VAT
-there are now 30 lenders offering specialist mortgage deals
-the average self-build project costs £147,000, well below average house prices
and on average appreciates by 25 to 30 per cent when complete
tips -
-spend a good time budgeting. The more realistic you are the smoother the
project will be. Those who don’t budget well have more of a chance of going over
the budget.
-have a contingency budget of 10 per cent - you might come across snags as the
building is underway, such as discovering more concrete is needed in the
foundations than anticipated. You also might have
other ideas along the way
This article has appeared in Mortgage Magazine which is available in all good
newsagents. Copyright MSM International Ltd
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