11:04 AM, 22nd March 2011, About 14 years ago
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Lisa Orme is an experienced property developer, investor and mortgage broker and specialises in property and financial services for new and established property investors. Lisa’s understanding of The Mortgage Works Refurbish Mortgage facility is highly regarded on Property Forums which is why we have asked her to provide some further insight into the mechanics of the scheme.
Refurb Mortgages. The Property Investors Dream!
By Lisa Orme
I have to say these are one of my favourite products around at the moment and while many investors are bemoaning the current marketplace we find ourselves in, lenders are actually launching a whole range of innovative products such as this. What is ironic is that during the boom years there weren’t many ‘creative products’ available and especially not refurbishment mortgages so we are actually quite lucky!
So how do they work? Essentially they allow you to buy and finance a property requiring works at the same rates as standard buy to let finance, complete the works and drawdown on some of the equity in a relatively short period of time. Up until these products were launched you had to wait until the property had been refurbished before using a buy to let mortgage, often having to fund the property with cash or expensive bridging finance initially and then waiting at least six months before remortgaging.
The Light Refurbishment product from The Mortgage Works allows you to drawdown up to £25,000 after works subject to a maximum of 70% of the end value and rental coverage. You don’t apply for a further advance or a remortgage however; these products work by way of a retention for the cost of works and/or additional drawdown with lending based upon 70% of the purchase price and then the end value.
To demonstrate:
| Purchase price | £69,950 |
| Initial loan 70% LTV | £48,965 |
| Cost of works | £15,000 |
| End value | £100,000 |
| End mortgage 70% LTV | £70,000 |
| Retention/Drawdown | £21,035 |
The property is valued at the beginning for its current value/purchase price and also its end value and cost of works. A reinspection takes place once works are completed and the retention is released. A charge of £100 is made for the reinspection which is deducted from the retention.
There are numerous advantages to this product including the lower cost of finance throughout the project, no need to remortgage paying additional valuation and legal fees and most importantly of all you know upfront the exact numbers you are playing with. Do not underestimate the importance of this.
If the property is down valued then you can decide whether to proceed or not before completing on the purchase; at worse you have lost a valuation fee. Whereas if you had paid for the property cash or with bridging and completed the works then had a down valuation you would have struggled to retrieve the cash in the deal. This way you know upfront exactly what money the deal will cost you.
There are some very clever ways to use this product for example:
You can use this product for a long term buy to sell strategy. Opt for a 12, 18 or 24 month fixed rate product to maximise cashflow and provide some security. Refurb and pull out some of your money initially then sell the property at the end of the term. While this takes longer than might have been achieved during the boom years it can create a rolling programme of releasing cash if you do this on a regular basis; say every third property deal.
The Mortgage Works will allow up to 4 sharers on a single tenancy on any of their standard mortgage products including the refurbishment product so you can also use this on a small multi let property; not only pulling out some of your costs and/or deposit but also increasing your cashflow dramatically by letting to 4 sharers.
It is also important to note a few things:
This product should not be used for major works, conversions, extensions, etc. It is for a light refurbishment only. Remember the valuer will see the property initially and after works have been completed and will report back to the lender if the property is not as intended.
The product should be used on what I would describe as a typical ‘rental refurb’:-
The retention must be drawn down within 3 months of the initial loan being released so it’s important to get on with the works asap and keep an eye on your calendar. You need to get your broker to request the reinspection and your solicitor will be sent the retention funds so work on about 2-3 weeks for this to take place.
This product is NOT aimed at Below Market Value purchases per se. They are aimed at properties that are unsuitable for letting upon purchase not to simply withdraw any discount. While the lender will allow you to drawdown more than just the cost of works it is not sufficient to aim for a £25,000 drawdown based upon simply changing the carpets!
It is best to talk through your plans and the numbers with your broker before using the product to understand how it works in practice and how it applies to your particular project.
I am aware that many investors and brokers are having trouble with this product finding they cannot get the retention released or the property is downvalued initially. When the product was first launched there were some administration issues but these were ironed out pretty quickly and my clients and I have been successfully using this product since its launch so do get in touch if you’re struggling to make these products work for you.
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If you’d like to discuss refurbishment mortgages or indeed any mortgage or financial requirements with Lisa you can contact her at lisa@keys-mortgages.com or call 024 7617 0096, please mention Property118.com when calling.
You can get updates, tips and advice at www.keys-mortgages.com or my blog at www.lisa-orme.com
The above is for information purposes only; rates can change and may not be applicable at the time of publication.
Please consult appropriate professionals and contact us for up to date quotations.
Keys (UK) Limited is an Appointed Representative of Julian Harris Mortgages Ltd. Authorised and regulated by the Financial Services Authority in the conduct of mortgage and general insurance business with FSA No. 304155.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loan secured on it.
Think carefully before securing other debts against your home.
Buy to let (pure) and commercial mortgages are not regulated by the FSA.
For full details of our terms, fees and disclosures please go to our website at www.keys-mortgages.com
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