The label ‘unmortgageble property’ sounds unappealing but it’s not a deterrent for many investors and landlords, who see a triple whammy of benefits when they buy this type of dwelling.
As well as a property usually bought at a below-market price, there’s the ability to quickly improve the home’s value through well-budgeted renovations and gain a vacant property at the end that’s ripe for renting to tenants.
Unmortgageble properties, however, do come with their own set of financial challenges – knowing how to overcome these involves understanding what an unmortgageble property is and where landlord finance may come from.
Why would a property be unmortgageable?
While there is generally a good appetite for lending, not every property is seen as a safe bet by banks and building societies. In fact, there are a number of reasons a lender could refuse a mortgage and these include:
- Properties without kitchens, bathrooms or central heating
- Unsecure, derelict or part-derelict properties
- Dwellings with structural issues, such as subsidence or a lack of damp proof course
- Properties of non-standard construction, such as timber, thatch or concrete frame buildings
- Properties with a non-native plant invasion, such as Japanese knotweed or bamboo
- Properties with severe damp, dry rot, wet rot, woodworm or beetle invasion
- Properties that have flooded previously or are at a high risk of flooding
- Properties with short leases – 80 years or less
- Properties with flying freeholds or creeping freeholds
- Properties where planning permission or building regulations approval is missing
- Part commercial properties
- Properties with cladding
- Properties with restrictive covenants, such as a restriction on the age of the occupant
- Properties that may be devalued by development, such as new motorways or airport expansions
- Properties with asbestos
- Buy-to-let properties with low EPC ratings
When a property falls into one or more of the above categories, lenders will be nervous that the property will be difficult to sell in the future and there lies the risk. Some of the most undesirable aspects may be environmental or outside of a purchaser’s control but others can be remedied – and that’s what makes unmortgageble properties attractive for some investors and landlords.
The most popular approach with unmortgageble properties is to repair and renovate as quickly as possible, then refinance with a standard mortgage or sell up as soon as the work is complete. This strategy, however, needs a double investment – money to fund the purchase and money to make the property habitable.
The key is cash
While some investors are cash rich and won’t need borrowed finance to help them buy an unmortgageable property, not everyone is in such a fortunate position. Many buyers will rely on a bridging loan or finance that’s secured against another property they own to make the purchase.
Unhelpfully, bridging loans often require a clear exit plan and many providers will not accept future rental income as a viable repayment strategy. Other buyers may have success with a specialist lender who will grant a mortgage for an unmortgageable property but in return, the lender will want a much higher deposit or inflict a crippling rate of interest.
Financing repairs and alterations
The additional challenge when buying an unmortgageable property is the extra finance needed to repair, improve and rebuild, extend leases or secure the property. Many cash buyers deplete their savings when making the initial purchase, while purchasers using credit will need to cap their borrowing to keep repayments low, or they may be refused additional lending altogether.
This issue can be especially tricky for landlords who have bought an unmortgageable property to do up and rent out, rather than sell on. Retrofit finance and specific landlord financing recognises that borrowing to renovate unmortgageable properties bound for the private rental market is problematic, especially when compounded by exceptionally high interest rates and stringent stress tests.
Factored has entered the market to provide a fresh solution to landlord financing. Instead of applying for additional lending or maxing out credit cards to make buy-to-lets habitable, landlords can sell their future rental income rights to Factored – even before tenants have moved in. The upfront and immediate cash available from Factored can be used for retrofitting, remedial work, legal fees and paying for lease extensions. No additional debt is accrued and our cash is quickly delivered so landlords can start their renovations and reduce void periods.
If you are exploring the idea of buying an unmortgageable property to rent out and would like a smarter way to fund work needed, contact Factored today.