Purchasing unmortgageable property can be an enticing opportunity for property investors, especially those looking for a bargain. However, it comes with its own set of challenges and risks. Understanding why a property is deemed unmortgageable, and the implications of buying one, is crucial for making an informed decision. Here, we’ll explore the reasons behind unmortgageable properties, potential solutions, and how Fraser Bond can assist you in navigating this market.
A property is considered unmortgageable if it fails to meet the lending criteria of banks or other mortgage providers. This can happen for several reasons, including:
Structural Issues Properties with significant structural problems, such as subsidence, major dampness, or inadequate foundations, are often rejected by mortgage lenders. These defects pose too much risk for lenders, who may fear that the property will lose value or be costly to repair.
Short Lease Terms If a leasehold property has a short lease, typically under 70 years, it becomes difficult or impossible to secure a mortgage. Short leases decrease the value of the property, making it less appealing to lenders.
Non-Standard Construction Properties made from non-standard materials, such as timber frames, prefabricated structures, or unusual building methods, can be deemed unmortgageable. Lenders may view these properties as less durable or more challenging to sell in the future.
Legal or Planning Issues Properties that have legal complications, such as missing deeds, boundary disputes, or unapproved extensions, are usually not accepted for mortgages. In addition, properties with planning permission issues or restrictive covenants can also deter lenders.
Uninhabitable Conditions If a property is considered uninhabitable (e.g., no kitchen, bathroom, or basic utilities), lenders may refuse to provide a mortgage. Uninhabitable properties are high-risk investments because they require significant work before they can be sold or rented out.
While the term “unmortgageable” may sound like a red flag, these properties can present unique investment opportunities. Here’s why some investors are drawn to unmortgageable properties:
Lower Purchase Price Because these properties are harder to finance, they often come with lower price tags. Investors who can pay cash or secure alternative financing can benefit from significant discounts, especially in prime locations.
High Return Potential For those willing to take on the challenge of repairs or legal work, unmortgageable properties can offer high returns. After resolving the issues that make the property unmortgageable, investors can resell or rent the property at a much higher value.
Redevelopment Opportunities Some unmortgageable properties have strong potential for redevelopment, especially if they are in sought-after areas. Investors with the right expertise and funding can transform these properties into valuable assets.
Cash-Only Purchases Most unmortgageable properties require cash buyers, as traditional lenders will not finance the purchase. This can limit the pool of potential buyers, making it more difficult to sell later on.
High Renovation Costs Many unmortgageable properties need extensive repairs or renovations, which can quickly eat into your investment budget. It’s essential to factor in these costs when considering whether the purchase is worthwhile.
Legal and Planning Complications Resolving legal issues or obtaining planning permission can be a lengthy and complex process. Investors should be prepared for potential delays and additional expenses.
Limited Resale Market Selling an unmortgageable property can be challenging, especially if the issues that made it unmortgageable have not been addressed. Investors should have a clear exit strategy in mind before purchasing.
If you're considering buying an unmortgageable property, here are some ways to navigate the process:
Cash Purchase Many investors buy unmortgageable properties with cash to avoid the difficulties of securing a mortgage. If you have the capital available, this can be a straightforward solution.
Bridging Loans A bridging loan is a short-term financing option that allows investors to purchase unmortgageable properties. Bridging loans can be used to finance the purchase and initial renovations, after which the property may become mortgageable, allowing for a standard mortgage to be secured.
Renovate to Mortgageable Standards If a property is unmortgageable due to structural issues or uninhabitable conditions, completing the necessary repairs can make the property mortgageable. Investors should carefully calculate the cost of renovations and the potential increase in property value to ensure it’s a profitable venture.
Extend the Lease For leasehold properties with short leases, it may be possible to extend the lease, making the property mortgageable again. This process can be complex and costly but can significantly increase the property's value and marketability.
At Fraser Bond, we specialize in helping clients navigate the complexities of purchasing and selling unmortgageable properties. Our team of property experts can guide you through the challenges and risks associated with these investments, offering solutions such as:
Whether you're looking to take advantage of lower prices, unlock redevelopment potential, or simply understand the risks of unmortgageable properties, Fraser Bond can provide the expert advice you need to make informed decisions. Contact us today to learn more about how we can assist with your property investment goals.
