ABC FinanceBridging loansUnmortgageable property

A Guide To Buying An Unmortgageable Property

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in bridging loans

Why buy an unmortgageable property?

The simple answer to this question is that they are often sold for far less than the what they would be worth once restored to a mortgageable state.

That may allow you to buy your dream home that would otherwise be unaffordable, or allow you to make a big profit from a property investment project.

What makes a property unmortgageable?

Before deciding to take the plunge and purchase this type of property, you should understand why it’s unmortgageable.

It’s not just derelict or fire damaged properties that are ineligible for traditional mortgages, there can be a number of other issues that prevent traditional lending.

Some of the more common reasons for properties being considered unmortgageable are the following:

  • Cladding that does not meet the new building regulation standards.
  • A short, or defective lease.
  • Structural issues.
  • The property is built using a non-standard construction method.
  • Japanese knotweed or other invasive weeds.
  • A sitting tenant that is subject to a regulated tenancy.
  • Boundary disputes.
  • The property is in a serious state of disrepair.
  • The property does not have a kitchen.
  • The property does not have a bathroom.
  • Missing planning permission or building regulations approval

Of course, this list isn’t exhaustive and you should find out the exact issues that affect the property that you are looking at.

A property I want to buy says cash buyers only, can I get finance?

Although these properties are often marketed to cash buyers only, there are often options out there for those looking to finance their purchase.

Where you’re able to prove that finance is achievable (a good broker will help you there), agents are usually happy to consider offers from those financing the purchase. The ability to provide this sort of documentary proof is one of the major benefits of working with a bridging loan broker.

Being a cash buyer doesn’t mean that you have to have the cash in the bank that day, but that you have all pieces in place to complete the purchase.

If you’re selling a property and will use the cash to complete the purchase of the new one, you’re not considered a cash buyer. This is because you could face delays in selling your current property or other issues.

You become a cash buyer once the sale of your current property is complete, even if you’ll be topping your purchase up with finance.

If you’re thinking of buying an unmortgageable property at auction, be sure to read our guide to buying property at auction.

What finance would be suitable for these properties?

These properties can be funded using bridging loans. They are a short-term and highly flexible form of finance that are often used provide finance for property refurbishment.

Bridging loan applications can be arranged very quickly, usually in 5-14 days, with lenders taking a common-sense approach to lending. When looking to take out bridging finance to fund the purchase of these properties, the lender will want a breakdown of why you’re looking to purchase the property and what you plan to do once the purchase is completed.

As these loans are short-term, they are ideal for funding the transaction while the property is being returned to a mortgageable condition. Using property refurbishment finance can significantly increase your return on investment.

Bridging loan rates are higher than those associated with mortgages, and they are usually arranged for a maximum term of 18 months. This means that they aren’t a viable long-term solution for funding these properties.

If you’re buying a property undervalue, you should consider an open market value bridging loan to reduce the amount of deposit required.

What costs can I expect?

Rates start at 0.55% per month – or 6.6% per year – far higher than most mortgages. In addition to the interest, you’ll also encounter a number of other costs.

The main costs to consider are the deposit required, this is usually around 35% of the property purchase price for unmortgageable property.

Lenders usually charge an arrangement fee for setting up the loan, which is usually 2% of the property value but may be lower for larger loans. Once the property is returned to a mortgageable state, your bridging loan can be repaid early in most cases.

Will I qualify for a bridging loan?

As mentioned above, if your application makes sense then your application will stand a good chance of being approved.

The biggest factor that impacts the likelihood of success is your exit strategy – how you will repay your bridging loan. A strong and reliable exit strategy means that the risk of failing to repay the loan is reduced, therefore reducing the risk to the lender.

Naturally, these properties require work to restore them back to a mortgageable state, whether that’s refurbishment work, legal work or a planning issue. Inexperience in dealing with these issues will lead to a more cautious approach from your new lender, but won’t exclude you from being approved.

Where the scope of work required is considered to be complex, they may ask that you work with an experienced professional who does have suitable experience.

Why working with an experienced bridging loan broker, you’ll give yourself the best chance of success, as they’ll be there to support you throughout the process.

Should I buy an unmortgageable property?

There is no simple answer to this question. When handled correctly, for the right property, it can be an excellent choice. That said, when buyers don’t approach things cautiously, it is easy for things to quickly go wrong.

There is an element of risk when buying these properties, but there is also the potential for a great reward by way of a healthy profit. When taking the leap into this market, it would be a wise move to surround yourself with those with experience in these transactions. They will be able to spot potential issues before they arise and support you throughout the process.

What happens once I’ve improved the property?

Once you’ve made improvements to the property, you will be able to refinance to a traditional mortgage. This will allow you to save interest and reduce your finance costs.

To do this, most lenders will want to see that the property is now habitable. This means they will expect to see that the property has a kitchen, bathroom and is in ‘liveable’ condition.

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