What do homebuyers need to know about mortgage retention?

Are you looking for a new house and considering a fixer-upper?

Perhaps you’ve found a property that needs a lot of work but that you know you can make perfect.

If this sounds like you and you’ve put in an offer and started to shop around for mortgages, there’s one rare but important risk you need to be aware of - mortgage retention.

Not heard of it? That’s where we can help. In this blog, we will outline what mortgage retention is and how it could affect your home purchase.

Mortgage valuation

In order to secure a mortgage, your lender will carry out a Valuation Report. There are several other surveys you can pay for that will take a closer look at the structure of the property you’re buying, but the Valuation Report is a survey you must pay for.

This report lets your mortgage provider know whether the property you’re buying and that they’re helping to fund the purchase of is worth what you’re set to pay for it. It’s important to your lender that you’re not paying more than what they think the property is worth, because if you were to default on your mortgage and they had to repossess it, they would lose money if they couldn’t sell it, or if it sold for less than you owe them.

A Mortgage Valuation Report doesn’t actually go into a whole lot of detail, and as a homebuyer it’s therefore worth considering another survey like a Condition Report, HomeBuyers Report or a Building Survey. These will give you a far more detailed insight into the condition of the property and any work that needs carrying out.

However, it is not unheard of for a simple Valuation Report to flag up a serious issue with a property. So what happens then?

Red flag

It may be that the Valuation Report flags up an issue that your mortgage provider recommends you look at. However, that issue could be of such concern to the lender that it decides to retain some of the money it has agreed to lend you – and this is known as mortgage retention.

Let’s say you find a house you love and put in a successful offer of £120,000. You have a deposit of £20,000 and a mortgage of £100,000. However, following the Valuation Report, your lender says that they think the property needs to be rewired and have a damp proof course put in. They say they will only release £90,000 of the mortgage funds and retain the other £10,000 for a limited period (usually six months) on the condition you get this work done. What should you do?

Well, unfortunately, you will need to come up with an additional £10,000 if you want to complete the purchase. You could go back and put in a lower offer in light of the findings, but the lender can simply reduce the money they release in-line with this. For example, you put in a new offer of £110,000 and the lender says they will release £80,000 to reflect this £10,000 drop.

A better course of action is to renegotiate with the vendors and ask that they carry out the work before you exchange contracts. If they agree to do this, you can request that your lender carry out a second Valuation Report with the knowledge the work they requested has been done, and they may then agree to release all the funds.

This course of action is of benefit to you as you won’t have to cough up the extra cash, and also to the vendors, as there’s no danger of the sale falling through.

But you should think carefully about whether you want to go ahead with the purchase at all. If the issues the report has raised are serious and costly to put right, you may prefer to look for a home that poses less of a risk.

Cough up the cash

If you’re unwilling to let the property go and the vendor won’t get the work done before you exchange, your only option is to come up with the money you need yourself. Remember, this will be on top of all your other moving day costs, including the deposit you’ve already saved, the Stamp Duty, your legal fees and the removal costs.

Be aware that as well as needing to stump up the money your mortgage lender has retained, you’ll also need to cover the cost of the work they’ve requested is done. Typically, a mortgage provider will retain the money they owe you for six months and release it once you can prove you’ve had the work done. If you miss this deadline, you won’t get the extra money back.

Speak to local tradespeople to get a few quotes for the work that’s needed. This way you can get the best deal possible.

You don’t actually have to claim back the money that was retained once the work is done, and you may even decide not to. This would mean your mortgage is smaller, so you may be able to pay it offer earlier than you originally planned.

We hope we’ve helped make the subject of mortgage retention a little clearer so that if it’s something that impacts on your house purchase you know what your options are.