Sunday, March 2, 2014

Non-Traditional Housing – Securing a mortgage is not easy!

There is no reason why older houses of non-traditional construction cannot be repaired and refurbished to provide comfortable homes that can last for many years.  The issues however will come when an owner decides that they want to sell.  Lenders are very reluctant to borrow on such properties, which in itself is likely to make prospective purchasers nervous

Non-traditional housing generally relates to any property that is not built using traditional methods and materials. A traditionally built property would be of solid wall or cavity wall construction built with masonry (bricks/stone/blocks) and mortar. Non-traditional properties include those ‘designated defective’ under the Housing Act 1985 and those other types that have not been ‘designated’ but which are still not of a ‘traditional’ type (certain timber frame types for example). Certain non-traditional types are not mortgageable without significant amounts of work being undertaken to recognised standards.

Understandably, lenders often get very nervous about borrowing money to those who are planning to purchase a non-traditional house and although we may wonder why such a cautious approach is taken it is worth considering the risk to the lender.  In actual fact, the lender ‘owns’ a property until a loan has been paid back in full and have the right to re-possess in the event of a default in payments or a significant loss in value.  The lender needs to be satisfied that in the event of such a default that they can recoup the value of the loan at any point in time. Basically, lenders want to make sure that a property is readily saleable and isn't likely to have any serious defects in the construction.  In assessing whether to provide a mortgage a lender will consider the borrower’s ability to maintain mortgage repayments as well as establishing whether a property is considered to be an acceptable security in which to secure the mortgage loan.  It is the latter of these two criteria which comes under the spotlight when the property is classified as non-traditional.

Trying to secure a mortgage on a non-traditional property can prove to be problematic, with a limited number of lenders offering such a product.  Many lenders are not prepared to take the risk and avoid this market completely, however there are a number of lenders who are willing to provide mortgages on non-traditional properties, although this usually comes with a number of requirements that will need to met before a mortgage loan is offered.  A particular requirement may be for the property to have an Assessment in Accordance with Non Traditional Homes Appraisal Scheme (NTHAS). 
'The scheme takes a pragmatic and common sense approach to the structural assessment of these property types and does not automatically assume that at all forms of non traditional construction are defective. Very often it is sufficient to protect the underlying structure from further deterioration and exposure to the elements by the adoption of either a lightweight insulated render over cladding or brick cladding coupled with repairs and strengthening measures’ Source: 
It is these types of measures that may provide the security necessary and give a lender sufficient confidence to provide a mortgage loan.
A number of years ago I was acting as Consultant for a medium sized Registered Social Landlord (RSL).  Five years earlier the RSL had taken ownership of approximately 1500 former Local Authority tenanted houses through stock transfer. Over the five year period the RSL had worked very hard to meet their ‘promises’ commitment, which required them to complete a comprehensive programme of refurbishment/upgrades and demolition and a new build programme.  For those who are not aware of the intricacies of stock transfer, part of the process requires consultation with tenants with a view to gaining their support and commitment so that they will vote in favour of the transfer.  During the consultation the proposed new RSL will detail improvements they will make and make a number of commitments or promises together with likely timescales should the tenants vote for the transfer.  The RSL I was acting for was now reaching the end of this initial programme and were now considering how to strategically proceed with a number of non-traditional houses they have inherited through the stock transfer.

As part of the appraisal we considered a number of options to maximise the assets, one of which was to consider selling properties on the open market.  In order for this to happen we had to ensure that the properties were mortgageable and not only that but also to establish which lenders would be able to offer mortgages on these properties, so that prospective purchasers could be directed to a selection of lenders.  After a number of months of consulting with lenders we established a list of just three who were willing to offer a mortgage. All three lenders stipulated that each of the properties must have a structural assessment and that a comprehensive programme of repairs/upgrade must be undertaken.  This included concrete repairs, where appropriate as well as the installation of an externally insulated render system and window replacements to the external envelope to improve the very poor thermal efficiency of most non-traditional housing.  As you would expect, these improvements and repairs were not cheap, so it was necessary to factor in these costs together with the cost of professional fees, warranties and the like and then weigh them up against the likely return based upon the open market value.  Even if these works were to be carried out, the properties would always be classified as non-traditional construction and the client felt that this would significantly impact on the number of prospective purchasers and in particular their restricted ability to obtain a competitive mortgage due to the limited number of lenders willing to provide one.  In the end the client felt that the most viable option we provided was to demolish their non-traditional over the next few years and replace them with new build.

In summary, there is no reason why older houses of non-traditional construction cannot be repaired and refurbished to provide comfortable homes that can last for many years.  The issues however will come when an owner decides that they want to sell.  As discussed above, lenders are very reluctant to borrow on such properties, which in itself is likely to make prospective purchasers nervous. With the amount of non-traditionally constructed houses in existence in the UK this is an issue that many are likely to encounter for a number of years to come.  Consequently, cash paying property investors may see non-traditionally constructed houses as an opportunity as some may be in a position where they do not need a mortgage loan. They are likely to be able to achieve good rental yields over many years, based on the fact that they may be able to pick up these types of properties relatively cheaply.

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  1. Gary, I assume you mean that lenders won't lend on 'non trad' and that potential buyers cannot borrow from the lender to buy a 'non trad' house?

  2. I am currently trying to buy a 1920's timber frame constructed property with block cavity but because it was constructed pre 1970's most lenders like Halifax, Santander, Virgin money will not lend on it as it falls outside their lending criteria. The high street banks that will lend on it require a bigger deposit. The house is sitting perfect as the current owners have lavished a lot of time & attention on it.