What is a renovation mortgage?

If new build properties aren’t your thing and you’re determined to create a personalised home that reflects your style, you might have considered buying a property to renovate.

 Or perhaps you’re an investor with plans to flip a house? While property prices have risen by up to 10% in some areas, there are still gems to be found across the UK with potential.

But how do you get the finance needed to purchase a house or flat that isn’t habitable? How much are the fees involved and do you have to have bought a renovation project before to pass eligibility checks for mortgage lenders?

What is a renovation mortgage?

This type of mortgage provides the money needed to buy a property in need of renovating, either at auction or on the open market.

Properties that are derelict, have no running water or electricity or need extensive repairs are considered unmortgageable with most high street banks and lenders.

Most of the lenders that provide renovation mortgages base the size of the loan on the post-renovation property value (what the property is expected to be worth once renovations are complete).

That can help because it gives you a potentially bigger budget to work with, as opposed to getting a mortgage based on the current value of the property.

Doing up a property with a mortgage is considered risky because, during the renovation process, you could encounter unexpected costs or expensive issues with the property that could result in you not being able to complete it.

If you’re eligible, a renovation mortgage could give you enough finance to cover:

Can I use a conventional mortgage to buy a doer-upper?

It’s certainly possible and many people take this option if the property they want to buy needs repairs but is in a habitable condition.  

First-time buyers might opt for this if they’re on a budget and don’t need additional money to cover the cost of renovations as they are either doing the majority of the work themselves, the work is mostly cosmetic or they have money via their income or from a parent to cover the costs.

That being said, some borrowers, including investors, get a conventional mortgage for a fixer-upper and then take out an additional loan later down the line for renovations.

If your current affordability for a mortgage restricts you from borrowing a greater amount, this might be an option to consider, although your circumstances and plans for renovations will affect your ability to get approved.

How much deposit will I need for a mortgage to renovate a house?

Most renovation mortgage lenders require chunkier deposits between 15-20% of the total budget. So, if you needed £200,000 to buy a property, renovate it, pay labour and any fees involved, you could expect to need between £30,000 - £40,000.

This deposit can be funded:

• From savings
• From the sale of assets such as your current home
• By a gift from family members

Low deposit mortgages for renovation purposes are hard to come by but not completely impossible.

Your own circumstances will determine your ability to get approved for a mortgage with a lower deposit requirement so always check your eligibility for a mortgage product before making a formal application.

If you get rejected for that mortgage, it could appear on your credit report for other lenders to see and they might question what made you get declined.

I have debt, can I get a mortgage to renovate a property?

Yes, while having recent and severe debt can work against you for many lenders who will deem it as bad credit, there are a handful of lenders in the UK that do accept borrowers with debt.

Your debt-to-income ratio will likely be calculated by your chosen lender to calculate the level of debt you have against your income. This determines if your current debt is affordable and whether the additional debt of a mortgage would be too much.

You can calculate your DTI ratio yourself or have a mortgage broker do it for you.

Here’s the maths:
(Total monthly debt payments) / (total gross monthly income)
£400/£2,000=0.2&
Multiply this amount by 100 to convert it to a recognisable percentage.
£400/£2,000=0.2 (x100) 20%

A DTI ratio of 20% would be acceptable with lots of lenders whereas a DTI of more than 50% could limit your options for finance.

Usually, the higher the DTI ratio, the fewer lenders will be willing to approve your mortgage. You can learn more about DTI in our guide or contact a mortgage broker who can show you where the lenders are that do accept borrowers with higher amounts of debt.

Do I need a good credit score to get a renovation mortgage?

Having a higher credit score can help to improve your affordability for a mortgage because it indicates that you’re a less risky borrower who repays their debts and manages their money sensibly.

If your credit score simmers in the red or orange zones, don’t worry. There are specialist lenders for borrowers with a low credit score or a poor credit history, although they usually charge higher rates of interest and that can make your mortgage more expensive overall.

You can work to improve your credit score by regularly accessing your report and checking if the information on it is accurate.

Some credit mishaps remain on a credit report for up to six years but mistakes happen. If you notice missed repayments or debt on your file but you think it’s wrong or outdated, you can contact the original creditor and contest it.

Improving your credit score to get a mortgage to renovate 

The higher your credit score, the better your chances of approval for a mortgage. Here are some tips on how to raise your score and access a wider pool of lenders and interest rates.

• Sign up for the electoral to prove where you live.
• Don’t move often if possible - lenders like stability.
• Pay any financial commitments on time and in full.
• Don’t apply for credit with multiple lenders within a short space of time or to a lender that you’re likely to get rejected by.
• Keep your credit utilisation low. If you’re constantly overdrawn or borrowing large amounts on your credit card, lenders might think that you’re unable to manage your money.
• A lower credit utilisation percentage is better and ideally, you want to keep it under 30% of your maximum borrowing ability. So, if you could borrow £3,000 on a credit card, but you only borrow £900, your credit utilisation percentage would be 30%.
• Connect your current account to an Experian account. This gives lenders more information about your finances and can help to boost your score.
• Keep old credit accounts open to provide a longer overview of your money management skills. If you have accounts for credit that are still open but rarely or never used, don’t close them. Keeping them open demonstrates that you have credit available to you but don’t need it.

Can I get a renovation mortgage for a property I already own?

If you already own the property you plan to renovate, the cheapest way to borrow might be a remortgage, though it’s always worth comparing your other options which might include a personal loan, though typically rates can be higher for these.

The amount you can borrow on a remortgage for renovation works will depend on:

• The amount of equity you own (how much of your mortgage you’ve paid off).
• Your credit rating.
• How much the proposed improvement may add to the property’s value.

If you decide to remortgage your home to make improvements, your new mortgage term could range anywhere between 5-40 years, though keep in mind that the longer your term, the more interest you’ll pay overall.

Keep in mind that while remortgaging may secure you a lower interest rate, that won’t always be the case as it’s your current circumstances that affect your ability to get a good interest rate, not the circumstances you had when you first took out a mortgage.

If you’re now earning less, have bad credit or are nearing retirement, you might not be eligible for the most competitive rates for renovation remortgages but that’s not to say that a good deal can’t be negotiated by a mortgage broker.

A broker has access to a network of lenders, each with varying criteria for mortgages. It’s their job to find you the most affordable and suitable agreement based on your finances and your ambitions for renovating your property.

How to get a mortgage for a fixer-upper property

Get organised

Do you know the documents needed to apply for a mortgage to renovate a property? Having them ready in preparation for your mortgage application can speed the process up. Here’s what a lender will ask you for:

• Proof of ID (passport or driver’s licence).
• Proof of income - 3 months of bank statements if you’re employed or a minimum of one year of accounts (SA302s) if you’re self-employed.
• Proof of credit history - You can download your credit report from credit reference agencies including Equifax, Clearscore or Checkmyfile.
• Proof of current address - A recent utility bill or council tax bill can be used.

Arrange funding for a renovation mortgage before looking for a property

You won’t know your renovation budget until you know how much you can get approved for on a mortgage.

Looking at properties on the open market or at an auction without having the finance in place can be a waste of time, especially as cheap properties or investment opportunities can get snapped up quickly.

To act fast with the finance you need to make an offer on a house, speak to a mortgage broker who can arrange a mortgage for you.

Compare a lot of renovation lenders

There will be pros and cons to consider for each lender on the market. You might prefer a contract with the flexibility to leave so you can remortgage in the future, or perhaps it’s a low deposit requirement you’re looking for.

There are lots of factors that can affect the overall cost you pay for your renovation mortgage, so to find the cheapest and most suitable deal for you, look at lots of lenders with different agreements.

Yes, this is time-consuming, so if you’re not a fan of scrolling through lending criteria and you’re unsure about which lenders even offer this sort of mortgage, ask an expert with access to the current deals. Some mortgage deals aren’t listed on comparison sites and others can only be secured via an intermediary like a mortgage broker.

Fixer-upper mortgages: FAQs

How does the property type affect the chances of approval for a fixer-upper mortgage?

Some property types will be unmortgageable depending on the lender and their criteria because they’re deemed as posing too much risk for the lender. 
 
Properties with unique features like a thatched roof or timber walls can be expensive to repair because skilled tradesmen or very specific materials need to be paid for.

The cost of this, as well as the increased insurance, can make a purchase like this too expensive and therefore too risky for a lender to provide finance for.

What properties might not be mortgageable for a renovation mortgage?

• High-rise flats
• Properties above shops or restaurants
• Older properties
• Listed properties
• Properties made from non-standard construction materials like glass, metal or concrete
• Properties with non-standard features like stained-glass windows, unique architecture
• Eco homes

That won’t be the case with every lender as some specialise in providing mortgages for unique houses or homes that are a little out of the ordinary.

Maximise your chances of approval for a renovation mortgage and ask a mortgage broker to highlight the UK lenders that are more equipped to deal with renovation mortgages for non-standard homes.