by Veronica Daly
Amid the current housing crisis, there is a well-documented lack of housing supply, so an increasing number of people are looking at older houses with a view to refurbishing. On the plus side, buying a house that requires renovation can be an effective way to create a home tailored to your needs. It can also provide access to locations or property types that might otherwise be unaffordable. However, renovation projects carry financial, legal and construction risks that must be investigated before contracts are signed. The above risks can also impact your mortgage application.
The most important rule is simple: assess the purchase and renovation as one project. A low asking price does not necessarily represent good value once building costs, professional fees, energy upgrades and unexpected problems are included. If you feel that this is a viable option for you, though, then we would advise you consider the following.
Budget
Before viewing properties, buyers should calculate what they can afford to spend on both the purchase and the works. Mortgage approval in principle provides a useful starting point, but it does not guarantee that a lender will finance a particular property. As with self builds, there are only three lenders that will look at projects like these: AIB Group (AIB, EBS, Haven), Bank of Ireland, and PTSB. Once you know your borrowing power, you will need to calculate the structural cost of refurbishing the home. I would allow €1,900 per sq. metre in terms of potential cost, as this is the banks’ minimum costs for self-building. It is prudent, then, to cost at least this much, even though you may not be knocking the structure down and starting again.
While there are grants available to refurbishers, such as the derelict house grant, which gives between €50,000 and €70,000 towards the refurbishment, a person should remember that these grants are only paid out if the work is pre-approved, completed within a certain time frame, and to a certain set standard. In mortgage terms, the banks will not include these retroactive grants into your budget as they cannot ‘guarantee’ you will eventually receive the payment, so best advice is to leave them aside when budgeting.
When working out the overall purchase and renovation cost, it is important to factor in more than just the purchase price.
Allow for stamp duty, which is generally one per cent unless you are buying a very expensive property, as well as legal and bank valuation fees and any engineer’s fees. You will also need to budget for the renovation itself, including labour, materials and professional services, along with a contingency allowance for overruns and price increases. This should be a minimum of 10 per cent of the renovation costs. Planning costs should also be considered. While not every renovation requires planning permission, with some internal alterations and certain limited extensions potentially qualifying as exempted development, the relevant conditions and size restrictions must be met. Planning permission may still be required where the proposed works materially change the appearance or use of the building.
There are a couple of main options in funding all of the above.
Option A — Mortgage
plus cash
In this scenario the purchaser obtains a standard mortgage to purchase the property and then pays for the renovation from their savings. This is relatively straightforward but requires substantial cash reserves. However, even in this scenario the house must be deemed liveable for the bank to fund. As with all purchases, your chosen bank will do background checks on the property, using tools such as Daft.ie, their own valuer assessing the property, and they may request a copy of a structural report. If the house is over 100-years-old, they will always request the structural report. If this report calls out any defects, the banks will require proof that the buyer can afford repair them upfront and may restructure the mortgage, for example by releasing 90 per cent of the approved mortgage funds upfront and only allowing the remaining 10 per cent to drawdown once confirmation that the necessary works have been completed has been received.
Generally, though, if the house is structurally sound and in a habitable condition the bank will fund on it and you can use your cash to renovate afterwards. It is really important to remember that while you will look at a house as a potential forever home, the bank will always take a more clinical view of it – it is their security, after all, so they will look at a property and ask themselves, “how easy will it be to sell this house if we ever have to repossess it?”
Option B — Renovation/
self-build mortgage
This mortgage works exactly like a self-build mortgage, the type that someone looking to build a new home from scratch would apply for. The house is basically treated like a site, so the bank will give approximately 80 per cent of the purchase price upfront, with the remaining mortgage to be paid out in ‘stage payments’ as work progresses, just like a new build. Like self-builds, a person must have the full cost of the purchase and renovation, plus associated fees, accounted for ‘before’ a mortgage will be approved for same.
In this scenario, lenders will normally want detailed information about the proposed project, including detailed engineer’s costings on the bank’s specific template, plans, valuations and professional reports. A customer ‘must’ engage an engineer to cost and oversee the proposed works – they cannot perform this role themselves, even if they happen to have experience in the building trade.
Grants
There are numerous governments grants available that will apply to older properties, and these can improve comfort, reduce running costs and make an older property more attractive in the future. Typical measures include rebates for attic and wall insulation, airtightness improvements, ventilation, heating controls, heat pumps, solar photovoltaic panels and upgraded windows.
SEAI provides several routes for home energy upgrades, including individual grants, fully managed upgrades through registered One Stop Shops and support for qualifying households. Crucially, we would strongly advise that a person seeks professional guidance and advice from professionals rather than relying on hearsay and anecdotal information.
If a person is looking to use the Vacant house or Derelict house grant, they should not assume that a property will qualify simply because it looks abandoned. They may need evidence showing how long it has been vacant, proof of ownership, quotations and confirmation that work has not started prematurely. Conditions concerning occupancy, rental use or repayment may also apply. Grant eligibility should therefore be confirmed with the relevant local authority ‘before purchasing the property or commencing work’. These grants should be treated as conditional funding rather than guaranteed money. One point to note, though, is that if a person successfully claims the derelict or Vacant house grant, a second charge will be put on the title for a period of 10 years. This may lead to difficultly switching mortgages during that 10-year period.
If you have any questions on the above, or would like to speak to us in connection with a mortgage, please don’t hesitate to contact us. www.mtf.ie
