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What is an unmortgageable property?

There can be a number of reasons why a property may be ineligible for a standard mortgage. It could be something quite significant and obvious, for example the property is in a recently damaged state, following a fire or flood, but it could also be for a wide range of other reasons.

In simple terms though, any property that is not immediately habitable will be regarded as un-mortgageable. Most common examples are houses without a working kitchen or bathroom.

Some of the most common reasons for a property to be deemed as unsuitable security for a traditional mortgage are:

  • No kitchen
  • No working bathroom
  • Structural issues, including wet / dry rot or rising damp
  • Spray foam insulation
  • Some types of cladding that don’t conform to current building regulations
  • Properties built with non-standard construction methods, including timber framed, concrete or modular homes
  • If the property is unsafe
  • Asbestos or other substances deemed a health hazard
  • Dangerous electrics or gas
  • Properties that have significant damage and are no longer water tight
  • The presence of Japanese knotweed or other similarly invasive plants
  • Disputed boundaries to the property
  • Planning permission or building regulations approval issues
  • A short remaining lease term – properties with less than 60 years left on the lease will be classed as un-mortgageable by many lenders
  • A sitting tenant living in the property
  • Problems with the local area such as flooding or other environmental issues
  • Having a current value below a lenders’ minimum property value (often £50,000)

Advantages of buying an unmortgageable property

The key advantage of buying an unmortgageable property is that you may wind up with a real bargain. The purchase price is likely to be below the value of the property once the necessary works are completed to return it to a mortgageable condition.

Obviously in order to determine how much to pay for an unmortgageable property, you should have a good idea about how much work needs to be done, and how much that will cost to make the property mortgageable. You also need to consider what its value will be once it is in a mortgageable condition.

Then once you have added together:

Purchase price + stamp duty + solicitor fees + cost of work required + finance costs + estate agent costs for selling the property = Total cost of project

You need to compare this to how much you expect to sell the property for, often referred to as the Gross Development Value (GDV)

Total cost of projectGross Development Value = Profit

Buying a property, then carrying out improvements and solving issues that made it unmortgageable before you selling it, can be a profitable venture. However, it is very important to do your homework and not wind up overpaying when you purchase the property. It is also important not to overspend when carrying out the works.

Please also be aware that although there is much less demand for unmortgageable properties, hence the lower prices, there are many developers out there which certainly pushes the initial purchase price up.

Another situation to be careful of is when you are bidding against someone who doesn’t see a property as a project to make money on, but possible as their future dream home. Similarly, if it’s the property next to where they live and they plan to move an elderly relative in, or there is some other reason that means the property has an increased value to them. These buyers may be willing to pay that bit more for it, as they are not concerned about making any money in the short term. You don’t want to wind up bidding against someone like this.

Unmortgageable properties don’t have to be seen as a money-making project, they could just be a cheaper way to buy a home. Buying an unmortgagable property may enable you to purchase your dream home that would otherwise be out of your price range.

Many auction properties are unmortgageable but can offer the opportunity to purchase a property below its eventual market value.

If you are thinking about buying at auction then it is worth reading our property auction guide.

How to use bridging finance to purchase an unmortgageable property

Bridging finance offers the ideal solution to raising short-term funds to purchase an unmortgageable property. Bridging loans can be arranged much faster than a traditional mortgage, often within 1 to 2 weeks.

The interest rate on a bridging loan will usually be higher than on a traditional mortgage, but they are only intended to be a short-term finance solution to facilitate the purchase. Most lenders will offer a maximum loan to value of 75% to 80% gross (which includes the cost of fees and interest) so you will need a deposit of around 30% of the purchase price of the property. However, you can use other properties that you own as additional security for the bridging loan if you need to raise a higher amount. This could include raising additional funds to finance the costs of works required to improve the property and make it mortgageable.

The lender will want to know what your exit strategy is for your purchase. This might be the sale of the property once it is restored to a mortgageable condition, or you might wish to then refinance the property on either a residential mortgage to live there yourself, or a buy to let mortgage to rent it out as an investment property, depending on your plans for property.

If your planned exit is to refinance you will need to prove that your income will be sufficient to support your future mortgage application.

What is the 6-month rule for mortgages?

If you are planning to exit the bridging loan with a residential or buy to let mortgage, then you will need to take account of the 6-month rule.

The 6-month rule came into place after the financial crash of 2008, to stop buyers from immediately remortgaging a property after purchase, based on a higher valuation.

This was often done to effectively borrow back their deposit, and at that time many people remortgaged soon after buying a property for significantly more than they had actually paid literally a couple of months earlier.

As a consequence, guidance was brought in at that time by the Council of Mortgage Lenders. There are two things to be careful about with regards to the 6-month rule:

  1. Some lenders won’t provide a remortgage until you have owned the property for 6 months. Some lenders may even extend this to 12 months. This is not all lenders, but you should check to see if your preferred lender has this restriction.

    It is very frustrating and costly if you take out a bridging loan, do the required work to make the property mortgageable within 3 months to then find you can’t remortgage for another 3 months.

    Some lenders who have this restriction may complete the remortgage at 6 months, others may not even start the application process until you have owned the property for a full 6 months, therefore causing further delays.

  2. There are lenders who will remortgage within 6 months of owning the property, however the vast majority will only do so based on the purchase price paid for the property and not an increased valuation. It is important to realise that within the first 6 months, and for some lenders this may be 12 months, you won’t be able to find a remortgage product that will provide a facility based on the increased valuation of the property. Even if the work you have done has clearly doubled the value of the property, the lender will work from the purchase price when calculating how much they are able to lend.

    They will only work from the valuation report if the value has decreased since you purchased the property, in which case you have probably really messed up.

So, if your planned exit from a bridging loan is to refinance with a mortgage, then you will need to allow for the fact that your choice of mortgage products may be reduced and restricted if you are looking to exit the bridging loan within 6 months of your purchase.

What are the costs of using a bridging loan to finance the purchase of an unmortgageable property?

Interest rates for bridging finance are higher than for a traditional mortgage as they are only ever intended as a short-term loan. That said, the bridging industry has grown significantly in recent years and there are many plans with very competitive interest rates, that typically start from around 0.55% per month.

In addition, there will usually be a lender’s arrangement fee of around 2% of the bridging loan amount, although at KIS Finance we will reduce this fee for larger loan sizes.

Similarly to a traditional mortgage, there may be a valuation fee if a desk top valuation isn’t suitable. There will also be legal fees that you will need to pay, both for your own solicitor’s costs and for the lender’s legal costs.

Apart from any valuation fee (if required) that will have to be paid prior to completion, all other fees can be added to the loan amount, reducing the number of upfront costs that you will face.

There are often broker fees, but KIS Finance does not charge broker fees for arranging bridging loans.

Is it a good idea to buy an unmortgageable property?

Buying an unmortgageable property will usually be significantly cheaper when it comes to the purchase price. But it’s essential that you factor in all the costs of restoring the property to a state that will make it acceptable security for a mortgage lender.

Carefully consider the findings of the survey and get a number of estimates for the costs that will be involved in undertaking the works needed.

It is also worth speaking to some local estate agents to get their opinion about what the value of the property may be, once you have completed the intended work.

You will then need to weigh up the costs of the initial purchase, the required works and the cost of borrowing, against the end value of the property, to decide if it represents a worthwhile investment.