Home Renovation Mortgage – Complete Overview

Get a complete overview of a home renovation mortgage here. If you want to buy a ‚Äúfixer-upper‚Äù property or want to renovate your current home with an existing mortgage, you’ve come to the right place. 

Find out everything you need to know about the somewhat elusive renovation mortgages here!

How do you fund a house renovation?

There are many ways you can fund a house renovation, including unsecured personal loans, loans secured by home equity, and savings.

But if you want to buy a property and renovate it from the outset, you might need to consider a home renovation mortgage. 

What is a home renovation mortgage?

A home renovation mortgage is a type of mortgage that home buyers can consider when wanting to buy a property and complete renovations straight away. 

This may be necessary because the property may not be initially habitable. It could be derelict or have no running water and electricity. Or the mortgage could be used to buy a habitable but dated property that needs remodelling and investment. 

Some mortgage lenders may not be willing to lend money to home buyers who want to buy properties in need of serious renovations. Therefore, renovation mortgages may be the answer. 

However, it’s always important to consider all your options. You may want to speak to a mortgage broker first. 

Is it the same as a Fixer Upper mortgage?

A home renovation mortgage might be known by other names, including a fixer-upper mortgage or a buy-to-renovate mortgage. 

Whether they’re called fixer-upper mortgages or something else, these secured loans usually work in an identical way. 

How does a home renovation mortgage work?

As the name suggests, a home renovation mortgage will provide the buyer with a loan to help purchase and renovate a property. The lender provides a loan based on the projected property value after renovations have been completed. 

Therefore, these mortgages provide the buyer with a much greater amount of credit than if they were to take out a mortgage on the property based on its current and lesser value.

How much can I borrow for a renovation mortgage?

Renovation mortgages usually require you to have a deposit of around 20% of the property’s projected valuation. The mortgage provider will then give you the remaining 80% of the money to make the purchase and complete the renovations.

For example, you might see a deteriorating property listed for £80,000 and estimate that it will need £50,000 of work to make it liveable and to the standard you envision. The mortgage provider estimates that the value of the property once it has been ‚Äúfixed up‚Äù will be £160,000.

As the lender requires you to have a 20% deposit on the projected property value, you will need to have £32,000 as a deposit. The lender will then provide you with the remaining £128,000 to make the purchase and complete the renovations.

A home renovation mortgage comes with greater risks. There can be unexpected costs not anticipated during the due diligence phase and the cost of materials and labour can increase during the project. 

To mitigate these risks to the lender, fixer-upper mortgages can sometimes be paid out in instalments rather than a lump sum, comparable to mortgages to build a property. There might be an initial sum paid to complete certain renovations, and then the rest will be paid out when the milestone is reached. However, not all renovation mortgages work this way. 

Home renovation mortgage lenders

There are few mortgage providers lending to people who want to buy a derelict or unlivable home to renovate. This is simply because there is a lot more risk involved compared to when lenders off a conventional mortgage. 

You might have more options if you’re buying a property that is liveable today but you want to invest in and improve. Because the property is already in good enough shape to live in, there is less risk facing the mortgage provider.

Overall, you may have to look further than high-street lenders to get a renovation mortgage. And you might need to get mortgage advice and brokerage services beforehand. Some mortgage brokers specialise in this niche of secured loans.  

Do I need a good credit score to get a renovation mortgage?

You will need to satisfy the mortgage lender’s criteria to get approved for the renovation mortgage, which includes an assessment of your existing debt-to-income ratio and an assessment of your credit history.

You can be denied a mortgage if your credit score is too low, as determined by each individual lender. Some mortgages are still available to people with bad credit history. 

However, because a renovation mortgage already comes with greater risk, lenders’ minimum acceptable credit scores could be higher than normal. 

This is something that is best discussed with a mortgage broker in your initial consultation. 

How to improve your credit score before applying

Some of the ways to improve your credit score before applying for a fixer-upper mortgage are:

1. Prove your address by getting on the electoral register
2. Clear debts and arrears
3. Or keep your credit utilisation on credit cards low
4. Try not to relocate too often
5. Pay existing bills on time

Can you use a conventional mortgage instead?

You might be able to use a conventional mortgage to buy a property in need of work, as long as the residential mortgage provider deems the property habitable. Properties that are not habitable are usually not ‚Äúmortgageable‚Äù through conventional mortgages. 

However, when you use a conventional mortgage, you’ll only be given finance to cover around 80% of the current property value, not the value of the property after any renovations and improvements have been made. 

You will have to finance the property renovations separate from the mortgage, which may be possible with savings or through other types of lending. 

Home renovations on a property you already own

You might have searched for home renovation mortgages hoping to read about loans you can use to renovate a property you already own. Well, the good news is that is also a possibility for some homeowners. 

There are a number of loans you can use to help renovate a property you already own. You might need finance to get a new kitchen, extend your home with a conservatory or even complete a loft conversion. 

The most common loans used to make home improvements when you already own the property are secured loans. Specifically, you could consider:

1. A home improvement loan
2. A home equity loan
3. A home equity line of credit (HELOC)

Secured loans for home renovations

The loans listed above are exclusively available to people who own property already. This is because these loans require the loan to be secured with some of your available home equity. You can sometimes borrow as much as 80% of your home equity – if required. 

Most equity loans work in the same way, by providing a lump sum payment and then asking the homeowner to make monthly repayments that consist of repayment on the principal and interest (fixed or variable). 

However, there can sometimes be variations. A HELOC is an example of how a secured equity loan can work differently. With a HELCO, your loan is paid out as a smaller initial amount, and then a larger amount you can draw down on over a fixed period of time. Monthly repayments on the loan only begin after the drawdown period ends.

A HELOC can be a worthwhile consideration when completing home renovations because:

1. You can stage loan instalments in line with milestones within the renovation project. This can help with budgeting and help you when you’re not sure how much you need to borrow due to changing material and labour costs. 
2. You only pay interest on the amount you drawdown, so if you don’t use all of the loan you don’t have to pay interest on the part of the loan left untouched. This prevents overborrowing. 

The above doesn’t constitute financial advice. You should always get secured loan and mortgage advice to help with your personal decision. 

Can you mortgage your house to do a renovation?

Yes, you can remortgage your home to complete home renovations and home improvements. This works by remortgaging and simultaneously borrowing additional money against some of your home equity. It is sometimes called a cash-out refinancing. 

Instead of adding a separate secured debt against your home, you can simply extend your residential mortgage used to purchase the property, providing you have enough equity to secure the additional borrowing. 

You can remortgage to a different lender or stick with your current lender. For example, if you own a £200,000 property and have a £100,000 mortgage, you can use some of your 50% (£100,000) home equity to access a lump sum. If you needed £40,000 for a loft conversion, your new mortgage will be for £140,000.

The benefit of borrowing against equity to complete renovations is that the renovations themselves can increase the property value and therefore your home equity. But you also need to be aware of the risks. Moreover, it is likely to take much longer to pay off the bigger mortgage debt before you own the property outright. 

Do I need to tell my mortgage lender about a renovation?

If you carry our renovations on your property, you don’t have to tell your residential mortgage provider about these improvements. 

But you might want to in certain situations. 

You may have renovated an aspect of your property in the past, which has increased the property’s value. If you then wanted to borrow more against the property by extending your mortgage, possibly to complete more renovations, you should tell the mortgage provider.

They might want to revalue your home to see how much it’s now worth. If it has gone up in value, you will have more home equity in the property and could therefore have a greater borrowing power than what otherwise would have been offered if you never disclosed the home improvements. 

Home renovation mortgages (Quick summary!)

Home renovation mortgages are mortgage products used to help buyers pay for the property and complete renovations. They are provided based on the projected value of the property after renovations rather than the current value of the property, which may be inhabitable. 

Home renovations mortgages can be hard to find, usually because lenders face greater risk when offering them. You’ll be required to have at least a 20% deposit on the projected value of the home after renovations – not 20% of its purchase price!

A home renovation mortgage might also be used to describe extending an existing mortgage to make home renovations, or even second-charge mortgages (home equity loans) used to make home improvements. These are options for people who already bought a property but want to make changes to it. 

Discover more about secured lending

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Check out our secured loan centre for more information and lots of other easy-to-read and free guides!