Mortgages: With so many 100 per cent mortgages appearing on the market and thoughts now turning to 120 per cent loans, one could be forgiven for thinking that homebuyers will soon have no difficulty whatsoever in funding their dream purchase.
There is a perception abroad, after all, that lenders are practically "throwing" money at any would-be borrower who walks through their doors, no questions asked and with no restrictions. This notion is of course nonsense, with lenders all required by regulators to apply strict rules when deciding how much they can advance in a mortgage. This procedure, which includes a stress test to see how well the loan could be managed if interest rates rose and made it more expensive, is at this stage well-worn, with most economic analysis finding that today's borrowers can "afford" their mortgages.
The flipside of these stress tests of course is that some homebuyers will always be told that they will not be allowed to borrow as much as they think they need to fund their purchase, perhaps because the lender simply does not think the property is worth it. As with most financial products however, there will be ways of getting around this in certain circumstances.
Take, for example, the situation where the person applying for the mortgage wants to buy a wreck of a property that he intends to renovate. By completing the renovation, he will automatically be adding to the value of the house. Indeed, he will be adding to the value of the house as he goes along, with each little piece of work such as fitting out a kitchen or rewiring the electrical system having a beneficial impact.
In this scenario, lenders may be happy to advance the loan on the basis of what the property will be worth when the work is complete rather than on its current valuation. This is effectively a matter of releasing equity (the proportion of the house that is mortgage-free) as more equity is being built up.
Peter Bastable of broker Simply Mortgages says many mortgage applications are processed in this way, although he explains that the process can differ according to whether the buyer is doing the work himself or getting a contractor to complete it on his behalf. In the DIY case, he says a "catch 22" can be created whereby while the lender will advance enough to buy the house, the buyer will have to fund the first piece of work out of his own resources.
Only when this has been completed can more equity be released, as long as the original loan to value (the mortgage as a percentage of the property's value) is maintained at all times. The valuation will of course have to be judged by a professional valuer who might not necessarily share the owner's view on how much equity has been added.
Where the work is being done by a contractor under a schedule agreed with the lender and an architect, things will be more straightforward and can cost less, according to Mr Bastable. This is because lenders might consider lending all of the required mortgage at the start rather than in stages according to work completed.
The rationale for this, Mr Bastable explains, is that lenders always need to be sure that their funds are being used for the purpose outlined by the borrower. The other advantage with builders in this situation is, he says, that they will often do the work before being paid for it.
The initial valuation will cost about €127, while a final valuation will cost about half of that. In between, the lender may be happy to release cash in stages when it receives certificates of work completed from the architect working on the job.
Mr Bastable says that while no two cases are the same, he sees no real disadvantages in this type of "partial release".
"Equity release has grown significantly over the past few years and my belief is that in time it could become more significant than lending for house purchases," he says.
