Renovation mortgage worth it?

Oasis1

First time buyer here. I found a property with great potential, but needs a lot of work throughout to modernise it (new kitchen/bathroom/floors/windows etc). Plumbing, electrics and structure seem fine though (survey TBC). I've estimated cost of the work to be approx. £30k. Haven't made an offer yet, but would take this into consideration. Plus less than 90 years remaining on lease.

I wanted to know what considerations there are on deciding whether to get a renovation mortgage? I think I have just enough cash for a LTV 80% mortgage deposit and a pot to pay for the renovations. Would that be better so I'm not paying interest on the renovation costs? Just conscious of the balance between having enough of a deposit to get a good LTV and thus rate, but then having enough cash leftover to fund the renovations. Is it just easier to lump the two together and get a renovation mortgage?

I think I'm trying to find a calculation to work out what's cheapest that incorporates the deposit amount and mortgage rate, but I keep getting stuck trying to work it out. Also if I sell in 3 years time, does the mortgage rate really matter...?

Any thoughts/help appreciated!

Thanks

K_S

@oasis1 I'm not exactly what you mean by a renovation mortgage?

Assuming that the property is habitable with no structural issues, you *may* be able to get a mainstream residential mortgage on it. That would be the most cost-effective approach. 80+ years on the lease should be fine. If so, you could just withhold as much cash as you need to and get up to a 90% LTV (or even 95% LTV though some lenders will not go above 90% LTV on flats) mortgage, get the work done and then remortgage, either at the end of the fix or before that if you take out a no-ERC product. Rates-wise, currently there is not a huge difference from 75%-90% LTV.

If it's not currently mortgageable as above, then you may need to look at more expensive forms of finance such a bridging, etc. but you'd need a bigger deposit for that.

Edit: The above is assuming that you intend to live in the property. If it's to let, you're likely to need a minimum 25% deposit.

theartfullodger

Rule of thumb on renovation plans.

Almost always end up costing 3 times as much and taking twice as long.  If lucky: twice as expensive, 3 times longer.

Seriously, what would you do 3/4 of the way through your plan if the estimates turn out wrong, way too low?

Oasis1

Firstly - thanks so much for your response. It's pretty scary making these decisions, and despite lots of online research I'm still feeling a bit confused! So I'm grateful for your thoughts.

K_S said:

@oasis1 I'm not exactly what you mean by a renovation mortgage?

Assuming that the property is habitable with no structural issues, you *may* be able to get a mainstream residential mortgage on it. That would be the most cost-effective approach.

I'm not sure I know what I meant now...! I think I got confused with specialist ones used for derelict houses, and thought it would somehow be cost efficient.

Judging by what I've seen/heard so far, the property is habitable - it was tenanted by students until recently and apparently had been for 12 years. I'm told it's up to date with boiler/electrical checks etc. It just has a very dated/cheap kitchen/bathroom, stained grubby carpets (with clothes moths), single glazing with wooden frames that have minor rot in corners. I'd also want to remove/redo some non-structural wall partitions. I'm considering a level 3 survey, just incase.

K_S said:

80+ years on the lease should be fine.

I was going to ask that the owner request an extension on the lease, that I can then pay for on completion (as outlined in para 3 here: https://www.bishopslaw.co.uk/lease-extension/uk-leasehold-extensions/). Am I being over-worried about the lease? I just think it might be cheaper to get it extended before I do the work as it might (hopefully!) increase the property price, which I understand increases the cost of lease extensions too?

K_S said:

you could just withhold as much cash as you need to and get up to a 90% LTV (or even 95% LTV though some lenders will not go above 90% LTV on flats) mortgage, get the work done and then remortgage, either at the end of the fix or before that if you take out a no-ERC product. Rates-wise, currently there is not a huge difference from 75%-90% LTV.

That's really useful to know there's not much different with rates - I'd read MSE's FTB guide a while back and was under the impression getting to the next 5% could make a big difference. But I haven't seen this in practice when searching for mortgages.

So what you're saying is it's best to get a high LTV (say 90%) to retain as much free cash as possible for renovations (as long as I can afford the monthly payments). Can you tell me a bit more about the remortgaging process and how it would relate to the property being renovated at that point? At this point, I'm unsure whether I'd be in position of wanting to make it a long-term home, or sell it and aim to get another property.

[Deleted User]

I would disagree on the lease, anything under 90 should be seen as an issue unless easy to extend.

Oasis1

theartfullodger said:

Rule of thumb on renovation plans.

Almost always end up costing 3 times as much and taking twice as long.  If lucky: twice as expensive, 3 times longer.

Seriously, what would you do 3/4 of the way through your plan if the estimates turn out wrong, way too low?

Good point and more reason to hold back the cash instead of upping the deposit. I think my approach would be to make a prioritisation list that starts with must haves and ends with nice to haves. So if money runs out, I'll atleast have the core stuff done.

K_S

[Deleted User] said:

I would disagree on the lease, anything under 90 should be seen as an issue unless easy to extend.

@strictgold5208 Sorry if my post wasn't clear, it was limited to the mortgage aspect. As long as you have 80+ years on the lease, there'll be a decent number of lenders happy to consider. And for a leasehold flat, extending the lease using the statutory process should be fairly straightforward in most cases, the quickest being the process outlined by the OP above.

K_S

Oasis1 said:

Firstly - thanks so much for your response. It's pretty scary making these decisions, and despite lots of online research I'm still feeling a bit confused! So I'm grateful for your thoughts.

K_S said:

@oasis1 I'm not exactly what you mean by a renovation mortgage?

Assuming that the property is habitable with no structural issues, you *may* be able to get a mainstream residential mortgage on it. That would be the most cost-effective approach.

I'm not sure I know what I meant now...! I think I got confused with specialist ones used for derelict houses, and thought it would somehow be cost efficient.

Judging by what I've seen/heard so far, the property is habitable - it was tenanted by students until recently and apparently had been for 12 years. I'm told it's up to date with boiler/electrical checks etc. It just has a very dated/cheap kitchen/bathroom, stained grubby carpets (with clothes moths), single glazing with wooden frames that have minor rot in corners. I'd also want to remove/redo some non-structural wall partitions. I'm considering a level 3 survey, just incase.

K_S said:

80+ years on the lease should be fine.

I was going to ask that the owner request an extension on the lease, that I can then pay for on completion (as outlined in para 3 here: https://www.bishopslaw.co.uk/lease-extension/uk-leasehold-extensions/). Am I being over-worried about the lease? I just think it might be cheaper to get it extended before I do the work as it might (hopefully!) increase the property price, which I understand increases the cost of lease extensions too?

K_S said:

you could just withhold as much cash as you need to and get up to a 90% LTV (or even 95% LTV though some lenders will not go above 90% LTV on flats) mortgage, get the work done and then remortgage, either at the end of the fix or before that if you take out a no-ERC product. Rates-wise, currently there is not a huge difference from 75%-90% LTV.

That's really useful to know there's not much different with rates - I'd read MSE's FTB guide a while back and was under the impression getting to the next 5% could make a big difference. But I haven't seen this in practice when searching for mortgages.

So what you're saying is it's best to get a high LTV (say 90%) to retain as much free cash as possible for renovations (as long as I can afford the monthly payments). Can you tell me a bit more about the remortgaging process and how it would relate to the property being renovated at that point? At this point, I'm unsure whether I'd be in position of wanting to make it a long-term home, or sell it and aim to get another property.

@oasis1

- definitely sounds habitable based on your description, so you should be able to get a mainstream resi mortgage on it. All the issues mentioned appear to be cosmetic.

- what you've suggested re the lease is indeed a common way to go about it so you don't have to wait for 2 years

- a few months ago the rates at 75-90% LTV could differ by a 1-1.5%+ but after the recent rate rises for lower LTVs, the difference is minimal at present.

- I just want to be very clear that I'm NOT saying that taking out the largest mortgage possible is what you should do, just suggesting potential avenues to retain the cash you may need for the work.

- At remortgage time, assuming the work carried out has added to the value of the property, you may be able to remortgage at a lower LTV.

[Deleted User]

K_S said:

[Deleted User] said:

I would disagree on the lease, anything under 90 should be seen as an issue unless easy to extend.

@strictgold5208 Sorry if my post wasn't clear, it was limited to the mortgage aspect. As long as you have 80+ years on the lease, there'll be a decent number of lenders happy to consider. And for a leasehold flat, extending the lease using the statutory process should be fairly straightforward in most cases, the quickest being the process outlined by the OP above.

Sorry I didn't notice that new post. Yes certainly extend I would say.

Oasis1

[Deleted User] said:

K_S said:

[Deleted User] said:

I would disagree on the lease, anything under 90 should be seen as an issue unless easy to extend.

@strictgold5208 Sorry if my post wasn't clear, it was limited to the mortgage aspect. As long as you have 80+ years on the lease, there'll be a decent number of lenders happy to consider. And for a leasehold flat, extending the lease using the statutory process should be fairly straightforward in most cases, the quickest being the process outlined by the OP above.

Sorry I didn't notice that new post. Yes certainly extend I would say.

Thanks both. I'll pursue an extension with the vendor/agent. Is it automatically up to 125 years, or can you go for say, 105, to make it cheaper?

dimbo61

Is this a student area ?
HMO ? 
Have you seen a GSC, EICR ?
What is the EPC with single glazed wooden windows ?
This could be a huge money pit and a bad idea for a FTB unless you have deep pockets