Wrecks to riches with new DIY loans

Buy-to-let landlords who are keen to purchase run-down flats with good rental potential can now take out a “refurbishment mortgage”, thereby avoiding costly bridging loans.

The mortgage deal is welcome news for investors, many of whom want to seize the opportunity to buy bargain-priced properties but cannot raise sufficient finance.

Buy-to-let lending has dropped dramatically since the credit crunch hit nearly two years ago. In April 2007, 3,662 mortgage products were available, and 65 per cent of these required a deposit of 10 or 15 per cent. Today, there are fewer than 250 buy-to-let mortgage deals, according to online comparison service Moneyfacts.

Buying cheaper flats and then “adding value” by renovating them can provide better returns for landlords. However, lenders normally refuse to grant mortgages against the refurbished “end value” of a property, or they make “retentions”, meaning landlords have to fund the renovation costs themselves.

The refurbishment loan is being offered by Aldermore Bank. Landlords can borrow between £100,000 and £1 million. Borrowers are charged five per cent over base rate. Loans are based on a maximum 70 per cent of the property’s value after refurbishment and take into account the likely rent rather than the borrower’s income.

“It’s a cost-effective and convenient solution,” says David Whittaker of broker Mortgages For Business.

Typically, the mortgage is aimed at someone buying, say, four tatty flats in a house conversion that are then “upgraded” — cosmetic changes such as redecoration and perhaps a new kitchen or bathroom, rather than structural alterations which might require planning permission. Refurbishment works have to be completed in 180 days.