There are a lot of home improvement projects that fit the bill for a remortgage suitable for customers with residential mortgages. Much of the wider market for property development loans are structured around business customers, including property developers, landlords, and investors.
As a homeowner, it can be a minefield to navigate through the available options you have to fund a development, due to restrictions on residential borrowers.
Residential remortgages are available and there’s a huge choice with very flexible lending criteria that are perfectly suitable for large developments on your current property, so finance will not prevent you from up scaling your home, be that by installing a conservatory, loft conversion, or adding a single or even double-storey extension to the front, rear or side of your property.
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Obtain planning permission and/or advice
When planning to do any developments to your property, the planning department at your local council should be contacted to find out if you require planning permission before starting the project. In the case of double-storey extensions, it’s almost certain you will need planning permission.
Costings and Finance Options for Your Development Project
Heavy refurbishment finance
This type of mortgage is the most difficult type of finance to obtain for residential homeowners. There’s a lot more cost involved and the lender will want evidence of experience from past development projects. It’s mostly suitable for developers and those with a commercial interest in the property, which makes it difficult for homeowners to tap into this line of funding.
It is still possible, provided there is sufficient evidence of projected costings, backed up by a realistic schedule of works. The figures provided as estimates will usually need verifying by a valuation expert of the lender to ensure the schedule of works can be completed, and if all the works can actually be completed within the intended budget. Should you only be part-financing the project through a remortgage, the lender should be made aware of the total budget you have.
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Before you’ll be considered for a remortgage on the basis that funds are released to fund a property development, lenders will require documented evidence of costings and a detailed plan, accompanied with a timescale for stages of the development being completed by, if that’s applicable, such as for a large extension which can require lenders to be updated on the development progress. However, that isn’t always the case with certain developments and is determined by the type of loan you take out, which they all have different terms and conditions attached to them.
The costs that should be factored into larger development projects on your property include…
Trade Quotes from:
- Electricians (Registered Electrical Contractor)
- Gas Engineer (Gas Safe Registered)
If planning permission is required, the cost averages at £200 per application, with the exception of Northern Ireland where the cost can be £285.
All remortgages are based on your current property value, not prospective valuations after the development is completed. The majority of lenders will include a free valuation service, however if you want to get an independent valuation completed prior, it will cost.
The only time a future valuation may be considered is if you plan to sell the property, in which case, it’s more likely you’ll need to inquire about commercial development finance. Find the right type of finance to fund your development project.
This will be applicable to large developments that involve structural changes. It may be an extension being added, or a room being made open plan. If anything you do within the boundaries of your property requires modifications to certain walls – in particular load-bearing walls – you will need a specialist to ensure the project is completed safely whilst maintaining the structural integrity of your property.
Building control charges
Certain projects require a building control application. Subject to approval there may be additional building control inspections required. These are handled by your local authority and are an addition to planning permission, depending on the work you are having done.
Examples of development projects that can be subject to the Building Regulations 2010 include:
- “replace fuse boxes and connected electrics
- install a bathroom that will involve plumbing
- change electrics near a bath or shower
- put in a fixed air-conditioning system
- replace windows and doors
- replace roof coverings on pitched and flat roofs
- install or replace a heating system
- add extra radiators to a heating system”
Contact our experienced remortgage consultants for free funding advice.
Light refurbishment finance
Light renovation work is things like redecorating throughout your home, having your walls re-plastered or sometimes, a new kitchen or a new bathroom.
For kitchens and bathrooms, those can be subject to Building Control Regulations if they require modifications to the plumbing or the central fuse box (electrics). If this is the case, it may be considered as a light to heavy refurbishment rather than a light refurb.
The main concern with kitchens and bathrooms is that they must be in good working order for a home to be considered habitable. Once a kitchen is taken out or there’s no functioning bathroom, the home will be classed as uninhabitable, which means it’s not able to obtain a mortgage for.
That’s the risk to homeowners and lenders should things go wrong and it’s partly why you need to disclose your intentions for the remortgage finance at the outset.
We offer free bespoke advice from remortgage experts. Whole of market, custom finance options available.
Types of Remortgages to consider
Remortgaging for property development purposes is an investment for the long-term. As such, the largest concern most homeowners have is the cost of financing the project because it is a large sum of money to borrow. As such, it’s not as simple as comparing the best interest rates available and opting for that as your best choice. It likely won’t be as you should consider the type of finance you put in place.
A few of your options…
Offset mortgages link your savings to your mortgage. You won’t be earning interest on the savings, but you will be saving on the interest payments repayable over the term of the loan. It’s similar to having a guarantor, only less restrictive.
Naturally, an offset mortgage will only be applicable to those with savings. As an example, if you need to borrow £35,000 for a property development project, you wouldn’t need to borrow all of that. You could have savings of £10,000, therefore be able to lower your equity amount by that amount, which can be used to lower your monthly repayments, or repay the loan faster. It can be linked to one or more savings accounts, too, and it doesn’t have to be your own.
There are lenders that allow mortgages to be offset by another family member. This is a handy option if you have parents with savings who are happy to link those savings to your mortgage, which can then be used to lower the total amount your borrowing, or let you access better deals with a lower LTV ratio, which in turn opens up better remortgage deals. The reason being, there’s less unsecured finance being provided by the lender, so you’re able to get cheaper interest rates.
There are a couple of potential drawbacks…
1) If the savings are relied on for the income generated from the interest paid into the account then it could be an issue as once it’s linked to a mortgage, it’s used to offset the interest payments, which means the savings will stop earning any interest.
2) If those savings are expected to grow with inflation because once their linked to a mortgage, there’s no interest going to be paid, so the savings are going to lose their spending power. This is of more concern for longer-term finance, such as remortgaging to repay over a 20-year term.
Obtain free advice to find out all your options and the best rates available today.
Trackers are great when interest rates are low. There’s no certainty over how long they’ll be low for though. There’s added uncertainty when you enter an agreement for a tracker rate as they can be as short as 2-year tracker deals, 3-5-year trackers, or track the base rate for the entire term of the loan.
Before entering into this type of agreement, always check the lock-in terms. It’s next to impossible to remortgage without being locked in for a fixed term usually in the region of two-years. As the rate you’re borrowing at will vary as interest rates rise and fall, you won’t know for sure how much you’ll repay each month. Should the interest rates rise while you’re within the lock-in term of the loan, to a level you struggle to afford that you need to switch to a fixed rate, there will be early repayment charges payable for switching the type of product.
You’ll also need to know the rate that’s being tracked as there are two main base rates, the Bank of England (BoE), and the London Inter-Bank Offered Rate (LIBOR). The Bank of England issued an emergency rate cut in August of 2016 following the Brexit Referendum, which put the rate at a historic low of just 0.25%. The only mortgage products to benefit from the lower interest rates are those either being renewed with a lender that uses the Banks Base Rate (BBR) or currently on a BoE tracker.
In terms of eligibility for these types of loans, it’s dependent on your risk level. BoE trackers are mostly applicable to safe borrowers, for example those with a good credit score.
As the LIBOR rate is influenced by actual transactions by a large number of lenders, many of which include subprime lenders, the rates are often above the Bank of England base rate, although at times, that can be by a fractional percentage.
Find out if a tracker mortgage will save you money, and if so what type, and how much you can borrow for your development project.
Drop lock mortgage
This is a combination of tracker and fixed rate. You’ll start out on the tracker rate, which is linked to the Banks Base Rate (BBR). That’s set by the Bank of England or will track the LIBOR rate. Currently, the Bank of England rate is sitting at the lowest rate it’s been for decades so the only way it’s likely to go is up. The question nobody knows is by how much it’ll move and that’s the risk with tracker mortgages. There’s no telling by how much it’s going to vary.
For borrowers uncomfortable with the uncertainty, there are lenders now offering drop locks on their products, which mean you are able to move to a fixed rate at any time during your repayment period, without incurring an early repayment fee.
For those who lock into longer term arrangements, such as a five-year tracker rate, if the interest rates rose too much and you needed to switch to a fixed rate, you’d be charged the early settlement fee. With a drop lock product, you have the option to switch to a fixed rate, based on the rate at the time you trigger the fixed rate to begin and there are no penalties for switching.
For those who want to benefit from the current low interest rate, but are nervous about future rate hikes, this is an option to consider. Not all lenders offer these and comparison websites only list tracker mortgage rates without advertising which products have a drop lock available.
The only way to know all your options is to get advice from independent brokers who are Whole of Market, meaning they aren’t contracted to any lender and can access and advise on all types of mortgage options from every lender.
Our Brokers are Whole of Market and independent. Advice is free, as is your full quotation search.