Mortgage offer needed quickly for renovation project

j500_2

We are buying a part of a large old property which is to be bought as a shell, with contracts exchanged at the start with a deposit paid. The property is then to be renovated by a builder under a linked contract, then we will complete on the purchase when the renovation work is finished in around 6 months.

The total agreed for the property is £368,000 + £322,0000 renovation making the total value of the property £690,000. It will be worth more when done.

We are funding the deposit and renovation cost fully from savings and will need to borrow £276,000 which should be OK for us in terms of our earnings.

We are being asked to exchange now but have no mortgage offer in place. There is no kitchen or bathroom in the property currently so as I understand it most lenders will not value it or make a mortgage offer.

What is the quickest way to get a mortgage offer in these circumstances and will it need to be a specialist lender such as a self build mortgage given the lack of kitchen and bathroom?

We are really keen to exchagne so it is tempting just to exchange and apply for the mortgage later, but would we be mad to spend our life savings on a wing and a prayer without a firm mortgage offer in place now? Does an offer now mean much when we are not going to require the mortgage funds for another 6 months or so anyway?

Any thoughts or advice gratefully received.
J

amnblog

This is not self build case, nor a residential mortgage case.

This is a commercial case on commercial rates.

Contact a competent mortgage broker immediately.

j500_2

Thanks very much for the help, I hadn't considered that.

I was in touch with a mortgage broker who we have used before who didn't mention anything about this being commercial. I can see how possibly it might be considered a property development, and therefore commercial.

However if we intend to live in the property do you think it would definitely be seen as that? If so, why exactly?

The renovation is being carried out by a builder we are appointing under a standard form building contract so it does seem like a self build in a way too.

Its a tricky one. Although we don't require the funds until the renovation is finished and we're ready to complete and move in, we need to be sure that we'll be able to get the mortgage in 6 months time. And at this time the property isn't yet considered habitable due to no kitchen and bathroom. We can't proceed until we have some degree of certainty. We'd be risking not just the 10% deposit needed to exchange but the £322,000 we'll be paying to the builder.

Would a commercial lender make an offer now on the basis that it would be needed in 6 months time, or are they not going to entertain the idea as the property would then be something a standard lender would lend on by then? Seems like a catch 22.

Have you or anyone else any further thoughts?

Thanks
J

ACG

Is your intention to move into the property?

Your probably looking at bridging finance, this will allow you to purchase the property in no time, they will not value the property in the same way a normal lender would. They would base it on the property value, not the condition as it currentl stands (ie no bathroom/kitchen).

Once the property is in a condition where it is habitable you can then look to get a normal mortgage on the property.

The main issue here will be the agreement/contract you have in place. Before going any further i would be speaking to bridging lenders and a residential lender to ensure they will accept it. You dont want to get stuck on the bridging loan for longer than you need to be.

GMS

Speak to a broker.

Many variables here but the numbers may well make it possible. Affordability is the key both for the lender and more importantly for you.

Ensure you go in to this with a clearly defined exit route.

From what you have sad you are risking all of your funds and the builders none of theirs. Absolutely needs to be right for you.

TrickyDicky101

GMS wrote: »

From what you have sad you are risking all of your funds and the builders none of theirs. Absolutely needs to be right for you.

This is a really good point. What happens to you if the builder is unable to complete the renovations? You may be stuck on bridging finance unable to remortgage and with with much of your savings gone.

j500_2

We are not contractually obliged to complete until the renovation work is finished. By that point we will have spent a lot of money with the builder, but it would be our own savings rather than from a bridging loan. We'll be paying for work already done on a monthly basis. But we'd need a mortgage in order to complete, which should be totally fine as it would be habitable by then.
But for whatever reason a mortgage may not be forthcoming. I have read that the new FCA are tightening up affordability rules right now. We are both self employed company directors, and while we have excellent credit scores and I am very confident we'd pass affordability checks, there is a chance we would not get the mortgage.

What would happen then?

Thrugelmir

j500 wrote: »

We are not contractually obliged to complete until the renovation work is finished.

By exchanging contracts you are legally committed to purchase. If you default on the contract then the builder retains the value of the work done plus keeps the deposit paid initially.

GMS

j500 wrote: »

We are not contractually obliged to complete until the renovation work is finished. By that point we will have spent a lot of money with the builder, but it would be our own savings rather than from a bridging loan. We'll be paying for work already done on a monthly basis. But we'd need a mortgage in order to complete, which should be totally fine as it would be habitable by then.
But for whatever reason a mortgage may not be forthcoming. I have read that the new FCA are tightening up affordability rules right now. We are both self employed company directors, and while we have excellent credit scores and I am very confident we'd pass affordability checks, there is a chance we would not get the mortgage.

What would happen then?

It is not about your confidence in passing affordability. The lenders call the tune here.

Ultimately if you couldn't get a mortgage the property would need to be sold.

As company directors I assume you take salary and dividends? Is there retained profit in the company too?

How much salary and dividends have you taken in latest tax year? How much retained profit? Are previous 2 years similar figures?

What ages are you?

It would be possible to get a broker to look at the figures and give an indication. However criteria changes constantly so what is available today may not be in a week.

Your solicitor will almost certainly advise not to exchange without a mortgage offer in place but you can proceed at your own risk.

It MAY be possible to get a mortgage offer prior to exchange but as there is no bathroom or kitchen a full retention would be in place as a minimum. Obviously the lender could decide it is unsuitable security and decline but it may be worth a chat with a lender. Full retention means a mortgage offer with all of the funds held back until the works are completed.

Not a perfect solution but would potentially give a clearer indication of lender willingness to help.

j500_2

Thanks for the replies, they are most helpful.

Yes, we take salary and dividends totaling around £42k each. There is some retained profit in one of the companies. Retained profit may be a little less in one company, though better performance of the other during the same period.
We are in our early 40s.

Our broker is also suggesting its a commercial case like the previous poster suggested as standard lenders are reluctant to make an offer it seems.

Hopefully we can work out a deal with a commercial lender and not lose the house.
J

amnblog

As I said and ACG confirmed this is a commercial/bridging deal.

This means a 6 to 12 months funding deal now, to be replaced with permanent lending or settled via sale at a later date.

If your broker has not already gone down that route he/she does not know what they are doing.