Unmortgageable to Mortgageable: The Challenges of Financing Property

Monday 24th June | 7 minute read

Unmortgageable to mortgageable

Unmortgageable refers to a property that lenders consider too high-risk to extend a mortgage for, but how can you make an unmortgageable property mortgageable, and what challenges will you face? 

Selling or buying a property is often challenging, but when a property is labelled as unmortgageable, the situation can become even more complex. This term means lenders are unwilling to extend loans to potential buyers to purchase the property. This restriction can severely limit sellers' options and diminish their chances of a successful sale. However, for investors, an unmortgageable property represents a promising opportunity, but what challenges will investors face when buying and selling an unmortgageable property?

Unmortgageable Vs Mortgageable

This article identifies the most common reasons a property is deemed “unmortgageable”, the types of unmortgageable properties, and how you can make your property mortgageable.


What makes a property unmortgageable?

"Unmortgageable" means that lenders deem the property too high-risk (physical or legal risk), preventing a potential buyer from securing the necessary loan. Also known as 'non-mortgageable,' 'unfinanceable,' or 'unlendable,' these properties are typically identified during the valuation process, where Royal Institute of Chartered Surveyors (RICS) reports highlight problems with a red flag. For example, unmortgageable properties include properties built from non-standard construction materials or methods, significant structural issues, short leases, uninhabitable conditions, high flood risks, legal complications, or unconventional uses. Potential buyers find securing finance for non-standard construction properties difficult - as lenders are concerned about the property's resale value and the likelihood of recovering their funds.

What makes a property mortgageable?

A property is mortgageable when it meets specific criteria that assure lenders of its stability, value, and marketability. These criteria include (but are not limited to) standard construction (BSST construction), good structural conditions, a sufficient lease term, and a habitable state. These factors ensure the property is a secure investment, allowing potential buyers to obtain the necessary financing.

Opportunities with unmortgageable properties 

Opportunities with unmortgageable properties exist for buyers willing to take on higher risks or invest in property development. While unmortgageable properties may pose challenges in obtaining traditional financing, they can present unique opportunities.

  1. They're cheaper to buy. Unmortgageable properties sell at discounted prices due to their perceived risks and limited buyers. Investors can capitalise on these lower prices to acquire properties at a bargain and potentially achieve significant value through renovation, refurbishment or redevelopment.
  2. They offer opportunities for refurbishment and development. Unmortgageable properties typically require significant renovation or redevelopment (conversion) work to address their issues and make them mortgageable. Investors with the expertise and resources for property development can capitalise on these opportunities to add value and achieve higher returns upon resale.

Challenges with unmortgageable properties 

While unmortgageable properties provide ideal opportunities, some considerations may impact whether this is the right investment for you. 

Here are two key considerations to bear in mind:

  1. Unforeseen renovation expenses. Unmortgageable properties typically have structural flaws or issues that render them ineligible for standard mortgage approval. Before committing to such a purchase, conducting thorough inspections to uncover potential renovation needs is crucial. Unexpected repair costs can eat into your profit margins, particularly if hidden issues surface during renovation.
  2. Financing issues. Securing financing for an unmortgageable property can be significant unless you're a cash buyer. Lenders are wary of the elevated risk associated with these properties, making them hesitant to extend and provide the necessary finance. Overcoming this hurdle may require exploring alternative financing options (like bridging finance) or partnering with specialised lenders for unmortgageable properties.

What types of properties are unmortgageable?

Understanding the types of properties that fall under the category of "unmortgageable" is essential for homeowners and investors alike. We will discuss in further detail what classifies a property as unmortgageable, from non-standard construction properties to short-lease properties.

Non-standard construction properties

Non-standard construction includes a variety of building techniques and materials. The term was coined by the construction and insurance industries to classify properties that pose different risks due to their unconventional construction. Essentially, non-standard construction covers homes that don't fit the mould of the traditional brick house with a slate or tiled roof. Instead, you might find timber frames, cob walls, thatched roofs, or even wattle and daub, a method of weaving wooden strips together and daubing them with a mixture of clay, soil, and straw. But what are the most common materials for non-standard construction?

  • Timber construction. Timber framing, cladding, and composite systems are prevalent in the UK but may deviate from standard practices due to construction techniques and regional preferences.
  • Cob construction. It uses subsoil, straw, and clay for durability and eco-friendliness. It has been popular for centuries, with some structures lasting hundreds of years.
  • Concrete homes. These homes typically vary in quality, and issues like deterioration affect longevity. They are constructed from concrete blocks, precast panels, or reinforced concrete.
  • Steel-framed houses. Built post-World War II for cost-effectiveness, often clad in brick, it was classified as non-standard due to unique structural characteristics and maintenance requirements.
  • Prefabricated homes. Assembled from pre-made sections, prefabricated homes were widespread post-war to replace damaged buildings; they were considered non-standard due to their originally intended limited lifespan.

Properties with structural issues

Buildings with structural issues, such as significant defects or damage, are considered unmortgageable. Structural problems can raise concerns about the property's safety, stability, and resale value, deterring lenders from providing finance. Non-standard construction methods can contribute to these structural issues and categorise property as unmortgageable.

Short-lease

Properties with short lease terms (fewer than 70 years) can be deemed unmortgageable due to the associated risks for lenders. Short leases may pose uncertainties regarding the property's future value and ownership rights, making it difficult to secure long-term finance. Short-lease properties can also provide opportunities for buyers and investors alike. You can typically buy a short-lease property at a lower market value (losing 10-20% of the value when the length is deemed ‘short’) and extend the lease so the property is deemed mortgageable. It’s a great way to grab a property at a lower price, but you have to consider the lease extension costs and whether it makes financial sense. 


Can I get a mortgage on an unmortgageable property?

An unmortgageable property is, well, unmortgageable—but what can be done to make it mortgageable? In most cases, the answer is to convert the property. Whether it's an agricultural building, an office, a house missing a kitchen, or a post-war prefabricated property, conversion may be the answer! It may also just be a case that your unmortgageable property requires a new roof, kitchen or bathroom to get it accepted by a lender. Here are the most common circumstances where conversion or refurbishment can make a property mortgageable.

Agricultural to residential building conversion

Converting agricultural buildings like barns into residential homes can make them mortgageable. This involves securing planning permission, conducting structural assessments, and working with architects and builders to meet residential standards. Compliance with building regulations for insulation, plumbing, and electrical systems is essential. But even with considerable conversion, the property may still be considered non-standard construction and require specialist financing (here’s an example of where bridging loans have been used successfully). 

Office to residential building conversion

Converting office buildings into mortgageable residential units offers a prime investment opportunity. These conversions capitalise on existing structures, reducing construction costs and increasing the market value. Simplified regulatory processes and increased financing options further increase the attractiveness of these projects to investors. Investors can maximise returns by selecting properties in sought-after areas and ensuring quality conversions.

Permitted Development Rights (PDR), particularly under Class O, have streamlined the process of converting office buildings into residential properties, eliminating the need for full planning permission. While simplifying approvals, conversions under permitted development rights must still comply with building regulations (2010) and may be restricted in certain areas, such as conservation zones or where Article 4 Directions apply. By leveraging PDR, developers can efficiently convert office spaces into residential units.

Residential building conversion

Converting residential buildings involves updating existing structures to meet modern-day standards, but the feasibility due to costs of such projects varies depending on certain aspects (e.g., whether the building is pre-war or post-war). Financing non-standard construction is a significant factor when considering conversion, with many having structural aspects that cannot be converted to standard.


How can I finance an unmortgageable property?

Buying an unmortgageable property requires thinking outside the box and exploring alternative financing options. If you have the cash available, purchasing outright can streamline the process

Property conversion finance

Property conversion finance is a tailored form of short-term financing that allows developers to acquire and repurpose buildings. It’s often used to convert commercial or agricultural properties into residential dwellings. This could mean converting barns, offices, or other unusual buildings into residential. 

Property conversion finance varies based on the type and scale of the project. For light conversions, loan-to-value (LTV) ratios typically range from 65% to 75% of the property's current value. In contrast, heavy conversions involving substantial structural changes or commercial-to-residential transformations have lower LTV ratios ranging from 50% to 65% of the projected post-conversion value. These loans are typically short-term, spanning 6 to 24 months, with duration influenced by project complexity and lender terms.

Property refurbishment finance

Property refurbishment finance is all about renovating and upgrading unmortgageable properties to boost their value and make them mortgageable. Property refurbishment finance covers everything from structural repairs to decorative upgrades and ensuring the property meets current building codes. Lenders will look at the property’s current condition and projected value after the renovation to set the loan amount and terms, giving you flexible repayment options that suit your renovation schedule.

Bridging loans for unmortgageable property

Bridging loans are a quick funding solution for buying unmortgageable properties or covering gaps until you get long-term finance. These loans are fast, often set up in just a few days, making them ideal for auctions or urgent purchases. Bridging lenders usually base their loan amount on the property’s open market value, not just the purchase price, which can reduce your upfront costs. Keep an eye on the interest rates and fees, and ensure you have a solid plan to repay the loan, whether through refinancing or selling the property.

How much does a bridging loan cost?

Bridging loan costs can vary depending on the loan amount, loan-to-value ratio, term length, and credit history. Our bridging loan calculator will help you better understand the costs associated with your project.

Development finance for unmortgageable property

Development finance refers to niche financial products for property development projects.  For unmortgageable properties, these projects include renovating existing properties or converting spaces for residential purposes. Development finance usually offers lower LTV ratios than traditional mortgages, reflecting the higher risk. LTV ratios may range from 60% to 70% of the projected post-conversion value (GDV - Gross Development Value), with terms of up to 24 months. 

How can I calculate the cost of development finance?

The loan amount in development finance projects is typically determined by LTGDV, LTC, and LTV ratios. In contrast, the minimum amount is based on project costs and expected returns - to get a more accurate cost, use our calculator below.

Bridging Loan Calculator

  • Bridging Loan Calculator
  • Bridging Loan Calculator
Bridging Loan Calculator
  1. Loan amount required

    The loan amount required is also known as the total 'net' loan amount that you want to borrow.

    This is the amount you are expecting to receive before interest or any other charges have been added.

  2. Loan term

    This is the number of months that you'd like the loan for.

  3. Type of loan required

    The type of bridging loan required can influence the maximum permitted borrowing amount based on LTV.

    For example a loan for use in development of land with planning permissions allows for an LTV of up to 70%, compared to a similar loan for use with land without planning permission which is only available up to an LTV of 50%.

  4. Properties used as security

    Please enter the number of properties that you'd like to use as security for the loan.

  5. Property 1: Value

    The current market value of the property being used as security.

  6. Property 1: Mortgage balance

    If you have any mortgages or other secured loans on this property please total the outstanding value here. Note: We only need to know the total loan existing balance that will still be outstanding upon receipt of the bridging loan, so if you're intending to take a bridging loan to consolidate those other mortgages etc then the balance outstanding upon receipt of the bridging loan would be 0.

  7. Interest rolled up or paid monthly?

    Rolled up interest means the interest is charged at the end of each month and then added to the loan balance. Another term for this is compounded monthly interest. This is the normal interest charging method for bridging loans. It's then paid when the loan is redeemed.

    Pay monthly means that the interest is charged and paid at the end of each month. Another term for this is serviced interest. It's not added to the loan facility.

Your Loan Example

Net loan amount -

Loan amount required before interest, fees or any other costs have been added.

Broker fees (2%)-

Calculated as a percentage of the net loan amount. Amount of broker fee is illustrated, and the percentage charged is shown in brackets.

Lender facility fee (2%) -

Calculated as a percentage of the net loan amount. Amount of facility fee is illustrated, and the percentage charged is shown in brackets.

Net loan including fees -

This is the net loan amount plus fees.

Monthly interest rate -

Monthly rate of interest charged on the loan facility.

Average monthly interest -

This is the average monthly amount of interest charged based on the full term of the loan. Interest is calculated on the loan balance each month and then added to the facility.

Interest if the loan runs the full term -

This is the total amount of interest that will be charged if the loan is cleared at the end of its term.

Loan to value (LTV) -

This is calculated using the loan amount plus any mortgages left in place, and the total value of the properties used as security.

Other fees

These fees are incorporated into 'Net loan including fees' shown above.

Valuation fees -

This is the estimated cost if a full valuation is required on the properties offered as security. This figure maybe reduced if a desktop, drive by or existing valuation is sufficient for the lender.

Lenders administration fee -

Most lenders charge administration fees, the amount of which can vary. The fee shown is for a typical plan.

Estimated lender legal costs -

Borrowers are required to pay all legal fees incurred in relation to arranging their loan.

CHAPS Fee -

Lenders are charged a CHAPS fee for sending the proceeds of the loan to their solicitor. They claim this charge back from the borrower.

Loan settlement

Redemption administration fee -

Lenders charge an admin fee to remove their charge over the property when a loan is repaid.

Exit fee (0%) -

Some loan plans have exit fees. Almost all of our loans do not.

Redemption amount at full term -

This is the estimated amount required to repay the loan if it runs the full term.


Final thoughts

Buying the right unmortgageable property can be highly profitable when thoroughly considered and well executed.

While these investments have inherent risks, the potential for substantial profit is significant. To navigate this market successfully, it's wise to enlist the help of experienced professionals who can identify potential problems early and guide you through the entire process.

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