Renovation & Conversion
How Renovation & Conversion Mortgages Work
When you are renovating or converting you are likely to need money for the initial purchase of the property, and then for the building works. Some mortgage lenders will refuse to lend on properties that are uninhabitable (no working kitchen or bathroom) while others will lend based on the current value of the house, but will then not lend anything further until the project is complete and the property can be re-valued. This is known as applying a retention to the borrowing, and will only be suitable if you have access to sufficient cash to pay for all of the building work.
An alternative is a stage payment mortgage where the building work is broken down into identifiable stages. Naturally, stages are tailored according to individual projects, but as an example, you can expect stage releases for renovation and conversion projects, as follows:
Typical Stages: Renovation & Conversions
- Stage 1 Purchase of the property
- Stage 2 Preliminary costs and structural overhaul
- Stage 3 Wind & Watertight
- Stage 4 Plastering Services
- Stage 5 Second Fix
- Stage 6 To Completion
Funds from a stage payment mortgage can be paid out in two ways – either at the end of each build stage, known as arrears, or at the beginning of each stage, known as advance.
With an arrears stage payment mortgage the lender will release money to buy the property, usually up to 75% of the purchase price or value of the property and will then release the money for the building costs with each stage payment being made at the end of each stage (ie in arrears of the work being done). This type of mortgage may be suitable if you have access to cash to pay for the deposit on the property and the early stages of the building work.
Unless you use an arrears cost based mortgage, there is a risk of your project being down valued during the build which can cause obvious problems.
The safest option for a renovation or conversion project is an advance stage payment mortgage that is cost based. This means your payments are guaranteed based on your project costs and you will receive them before each stage rather than at the end providing you with the cash you need to buy materials and pay your builder.