Renovation mortgages are similar to standard mortgages but are aimed at buying and restoring derelict properties into livable houses. These mortgages are also called Local Authority Purchase and Renovation Loans.
It is a government-backed mortgage that helps you renovate an uninhabitable home. In order to qualify for these mortgages, the property must be vacant for at least two years. Once the restoration work is completed, the property needs to be used as your own accommodation. It cannot be rented out.
It is important to note that you must have been refused by commercial mortgage providers, including banks, in order to be eligible for government-backed renovation loans.
As these kinds of mortgages involve a lot of risk, most lenders do not accept applications for renovation mortgages, but this in no way implies that you have no options at all. There are some specialist lenders who provide renovation mortgages in Ireland.
When you apply for these mortgages from a direct ender, you will most likely find these deals:
- Stage-release mortgages
- Bridging loans
What are stage-release mortgages?
Stage-release mortgages are also called development mortgages. They are aimed at funding construction projects. Since a derelict property will be taken down before construction, it is hard to estimate the total cost of the project and how much you actually need to finance it. Therefore, payments are released in stages rather than in a lump sum.
Here is how these types of home renovation mortgages in Ireland work
- Funds are released at every milestone as your development project progresses. The stages include foundation, roofing, and finishing. There may be more stages depending on the type of project you have.
- Your lender will release money at every stage of completion, but they will send surveyors to evaluate the progress.
- You will be required to pay only interest, not the principal amount. Once the construction work is completed, the mortgage is automatically converted into a standard mortgage. You will be required to discharge the mortgage over a number of years.
Advantages
- You only pay interest on the drawn amount, not the entire balance. This keeps the total cost of a mortgage quite low.
- These mortgages are subject to structured funding. It means funds are released after the completion of every stage, ensuring the proper utilization of money. It also reduces the risk of borrowing extra money.
- This kind of funding ensures discipline as you will adhere to timelines and budgets, reducing the risk of overspending.
- They are flexible, as some lenders offer cost-based mortgages while others offer valuation-based mortgages, depending on your individual circumstances.
Disadvantages
- Funds are released on the basis of the estimated cost. If the actual construction cost exceeds the estimated one, you will have to bear the additional expenditure on your own.
- There could be a delay in funding as your lender’s surveyor will inspect the site to check the progress.
- If your lender offers valuation-based mortgages, there is a risk of valuing lower than the actual construction cost.
- These mortgages are not easily approved. Further, not many lenders offer them.
What are bridging loans?
A bridging loan is another type of mortgage for renovations in Ireland. Bridging loans are short-term loans. They are also used for construction projects. When you need funds instantly, you can consider using these loans.
Bridging loans are generally ideal when you need to wait for a longer time to arrange funds. For instance, your existing property is taking a bit longer to find a potential buyer. Many people think that these loans are suitable only for buying property at an auction, but these loans are also meant to be used for renovation and development.
There are two types of bridging loans:
- Those with no fixed repayment date are called open bridging loans. They are generally more expensive than closed bridging loans.
- Those with a fixed repayment date are called closed bridging loans. They are affordable but lack flexibility.
Pros and cons of bridging loans
| Advantages | Drawbacks |
| You can secure funds without waiting for your current one to sell. | Interest rates are extremely high. |
| The approval process is much faster than traditional mortgages. | You will need an exit strategy for these loans. |
| You have to pay only interest. The balloon payment is made at the end of the term. You can refinance it into a standard mortgage. | Since these loans are secured against the property, there is a risk of losing it in case of default. |
Factors that influence the borrowing amount
Here are the factors that influence the borrowing amount of renovation finance in Ireland:
- You will have to prove your repayment capacity. The mortgage monthly payments should be less than 35% of your net household income. Lenders hesitate to lend money to those applicants who are on a tight budget.
- How good your credit score is another factor. Your credit history should be stellar to apply for a property renovation mortgage in Ireland.
- The loan-to-value ratio is also a significant factor. Lenders will never fund the 100% cost of the property. You must have some money to pay for it upfront.
- Lenders will also take into account the level of renovation work. How long will your project take to get completed?
- The estimated value of your property.
The final word
You can take out renovation mortgages in Ireland in order to improve your house. However, you must bear in mind that home improvement here means making a dilapidated building livable. If you fail to secure renovation loans from direct lenders or traditional institutions, you should consider government-backed Local Authority Purchase and Renovation Loans.
If you need money to carry out a renovation project in your residential house, such as an attic conversion and roof repair, you should take out home improvement loans. They can be unsecured and secured depending on the total funds you borrow.
Whatever loans you tend to take out, make sure you have the potential to repay the debt on time.
James Wince is the lead author and financial expert at MyLoansBoat. With a decade-long journey in the financial market, he has actually amassed comprehensive understanding and hands-on experience, which he gives his informative, useful, and reader-friendly posts. Covering a broad spectrum of financial subjects – from personal loans to business financing, mortgage refinancing to debt consolidation- James has an incredible capability to break down complicated financial lingo into understandable language, permitting readers to make knowledgeable choices. Enthusiastic about financial literacy, James’s objective is to browse our readers through the frequently frustrating seas of finance.
