It is every property owner’s worst nightmare. You have agreed a sale on your property with a mortgage buyer and the survey has come back highlighting serious issues meaning the lender is not willing to go ahead with the mortgage and the buyer has had to pull out.
What does this actually mean for you and any future sale and what, if anything, can you do about it? Read on to learn everything you need to know about unmortgageable property.
Lenders such as banks or building societies loan out money with the purpose of making profit on that loan through interest paid by the borrower.
In the case of mortgages the amount to be loaned is substantial, the average house price in the UK, as of September 2023, is £291,000. Due to the size of the loan the financial institutions use the property being purchased as security against the loan. This means that if the borrower stops repaying the loan the banks can take possession of the property, commonly known as repossession, which they can then sell to recoup the loan amount. This reduces the risk for the lender of the loan not being repaid.
It is this risk that mortgage underwriters assess when making the decision to lend against a property or not. If there are factors that could affect either the borrowers ability to pay back the loan, such as high charges associated with the property or a risk to the resale value of the property, such as structural issues then lenders could make the decision to refuse to loan money against the property, making the property unmortgageable.
Some of the main risks as far as lenders are concerned are;
Now that we understand the reasons why a lender might refuse a mortgage let’s take a closer look at the most common reasons that a property might be unmortgageable.
With almost 5% of UK residential properties deemed unmortgageable it’s easy to see that there are of reasons that make lenders nervous, the most common factors include;
Your property being deemed unmortgageable might not need to worry you all that much if you are in a good financial position and you are planning to stay put, the problems begin when neither of these are the case. The three major issues you will face are;
This one is fairly straightforward, if your property has issues that mean you can not secure a mortgage against it then you won’t be able to remortgage it to release funds or use any other form of finance such as equity release, also known as a lifetime mortgage. Again this is down to the uncertainty around the loan being repaid.
The biggest headache you will face having an unmortgageable property is when the time comes that you have to sell it. The majority of buyers will be looking to get a mortgage, especially first time buyers and people looking to move up the property ladder, meaning that you are losing out on a large part of the market. In fact the only people that can buy your house are cash buyers, not only does this limit your market, which will likely lead to it taking much longer to find a buyer with an open market sale, but cash buyers will generally be looking for a discount to market value which leads to the next point.
Any issue that affects the mortgageability of your house will also have a knock on effect on the value of your property, unfortunately your property will be worth less than if it was mortgageable, exactly how much less we will get onto later.
If you do find yourself in a position where your property is unmortgageable you do have options available to you.
It is perfectly possible to sell an unmortgageable property through a traditional house sale, what is known as an open market sale. This is when you instruct an estate agent to market the property, facilitate viewing and negotiate any offers that come in. They will take a fee, generally this is based on the final sale price but some agents do work on a fixed fee. Once you are signed with an agent you are generally tied to them for a fixed period of time, usually around 3 months.
The drawbacks with selling an unmortgageable house through an estate agent is that the marketing methods they use are designed to attract the widest audience, which includes mortgage buyers. This can lead to your property sitting on the market for a substantial length of time.
Another potential downside if selling through an agent is when it comes to their valuation of your property. Most highstreet agents won’t come across too many unmortgageable properties, especially not in the same area at a similar time and this is an issue when it comes to an estate agent valuing a property.
Estate agents will use a comparable system to value properties, this means that they look for similar properties in your area which have sold recently and then use the prices that these properties sold at as a benchmark for what yours might be worth, given current market conditions. So if your neighbour has an identical property to yours in a similar condition which has recently sold for £200,000 then your property will be valued at a similar price. When it comes to properties with mortgageability issues these comparables are few and far between which can lead to inaccurate valuations, if a property is overvalued this will increase it’s time on market, slowing down the sale. If the property is undervalued you might secure a sale but could end up getting significantly less than you could have by selling through a different method.
One way to take the guesswork out of valuing your property is to let the market, rather than an agent, decide.
Property auctions work with a specific set of rules that the buyer has to abide by. Once a buyer has “won” a property by placing a successful bid they will immediately have to pay a deposit to secure the sale and then will have to complete the transaction in a predetermined timescale, which is generally around 28 days. Due to this strict time frame it is not possible for a mortgage buyer to purchase properties at auction meaning that anyone purchasing a property at auction is technically classed as a ‘cash buyer’ although this does not necessarily mean that they have the amount needed to purchase the property sitting in their bank account, often auction purchases will be completed with the help of a ‘bridging loan’ which is a higher risk category of lending so doesn’t fall under the same rules as a traditional mortgage loan.
While house auctions generally provide a much faster sale time than a traditional house sale it does come with risks, no one can predict how many buyers are going to be there on the day and how many of them are going to be interested in your property you could get luckily and your house could start a bidding war with you walking away with more than expected but at the same time your property could go down like a lead balloon and you could walk away with far less than you’d hoped.
If you don’t want to take the risk or if you need a faster sale than even an auction can provide then you still have another option.
House buying companies, sometimes called ‘cash buying companies’ or ‘quick sale companies’, do just that, they buy your house directly from you. They do not use a traditional mortgage to purchase your property, like an auction buyer they may use their own funds or some sort of finance facility or bridging loan.
They do differ from an auction buyer in 2 key aspects, firstly they can give you a guaranteed offer, they will carry out a valuation of your property determine what it is worth to them and make you an offer on the back of that, this will usually be around 80% of the ‘market value’ of the property. Once you have the offer you have a firm figure to work from so you are not at the mercy of bidders looking for a bargain.
The second difference is the speed of the purchase, unless you get very lucky on timing you will likely have to wait a month or two before your property can be listed and sold at auction, then if it does sell (which is no guarantee) you have to wait around 28 days for the transaction to complete. With a house buying company this time to transaction can be as little as a couple of weeks, a typical sale time is generally around 3 – 4 weeks but can be as fast as 2 weeks if necessary.
You do however need to be cautious when choosing a house buying company, less reputable companies will lure you in with an initial high offer and get you to sign a contract, only to then string you along and reduce the offer significantly at the last minute.
If you are considering a house buying company as an option, we provide a lot of information about how they work and how to avoid the rotten apples the article below is a good starting point or you can use our ‘find a buyer’ service to get matched with vetted and approved house buying companies tailored to your specific circumstances.
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Not all mortgage providers have the same criteria and some have different views on risk. This makes it more difficult than you might think to determine if your property is mortgageable or not but there are certain actions that you can take to help you find out.
Probably the most definitive way to tell if your property has any issues that might affect its mortgageability is to get a survey carried out by a qualified surveyor. After all this is what a lender will do. Generally speaking you will not need to get a full structural survey but a homebuyers report or similar will suffice. With this type of report the surveyor will be on the lookout for any issues that could be a problem for lenders. After an inspection of the home has been carried out the surveyor will provide a report, in this report there will be a section about the value of the property in certain scenarios which include the ‘market value’ and a ‘cash valuation’. If the property is unmortgageable the market value will come back as £0 or “nil value” if this is the case you can speak to the surveyor to find out exactly why, which should also be stated in the report with supporting evidence such as photos.
The mortgageability of a property substantially affects its value. A lender being unwilling to loan against a property highlights that it has a significant defect that poses a major risk to the long term viability of the property.
You also have to consider who will be buying an unmortgageable property which will likely be an investor or a developer. Depending on the issue, and other economic factors, an investor might take a view that if the property is habitable they can purchase it with their own cash funds and rent the property out. A developer will likely want to rectify the problem and then resell the property after a refurbishment. In either of these scenarios the buyer will not want to pay anywhere near what the property might be worth if it was mortgageable. For a developer this is straightforward to understand, they need to purchase the property and then spend additional capital on rectifying the problem and possible refurbishing the property, they will then look to sell it on, the difference between the market value of the property once the work has been carried out and the amount they have spent is their profit.
For investors looking to rent out the property they will be looking to achieve a high yield (which is the percentage of return that they make from their investment) in order to justify tying up their capital in the property since getting a buy to let mortgage is not an option. In order to ensure a high yield any investor would be looking to purchase the property at significantly below market value.
So how much will being unmortgageable devalue a property is a bit like asking how long is a piece of string, it will depend heavily on the issue. The two main things to consider are;
Every scenario will have a combination of those two factors and there is no definitive amount on how much risk will affect the price, this is down to the buyer’s individual tolerance to risk. Something like subsidence for example is expensive to fix and poses a high risk so you would expect a low valuation.
With all things considered you are likely to achieve between 60 – 80% of the “full market value” of the property depending on the particular issue and circumstances.
If you find yourself stuck with an unmortgageable property through no fault of your own then you could have options for seeking compensation. Typical scenarios where this might be possible are;
Japanese knotweed infestation – if your land has become infested with Japanese knotweed and you can trace the source to a neighbouring property or land you could be able to file a lawsuit for compensation.
Spray foam loft insulation – If you have had spray foam loft insulation installed and the company did not inform you of any potential downsides such as mortgageability issues then it could have been mis-sold, there are a growing number of cases being filed for this reason. It is estimated that as many as 250,000 homes in the UK could have spray foam loft insulation, in part due to the availability of government energy efficiency grants. In light of this many law firms are now offering specific spray foam claim services.
If none of the above applies to you but you feel that you are a victim of circumstances that were no fault of your own or you feel that you have been mis-sold a service or a victim of poor building work you could still have a rightful claim. It is always worth seeking professional advice from a qualified solicitor if you think you might have a case. Often they will offer a free initial consultation so you can discuss your case and they can tell you if it is something worth pursuing or not.
If you have an unmortgageable property it can feel as if you are stuck between a rock and hard place. Do you stump up the costs to fix the issue and hope that financial institutions will be willing to lend on the property? Or do you sell to a cash buyer and just accept that you are going to get less for your property than initially hoped? It will always be a difficult decision and will be dependent on your particular circumstances, it is always best to seek professional advice where possible, speaking to estate agents, mortgage brokers and possible even solicitors can help inform your decision so you can come up with the best option for you.
If speed is of the essence it is always worth getting a no obligation cash offer from a house buying company which can help you weigh up your options. To see what an offer from a house buying company might look like use our ‘find a buyer’ service below.
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