How to get mortgages for unconventional properties

When a property is unconventional, it can be very hard to find a mortgage lender, says Chris Partridge

The property market hates houses that are different in some way. They are difficult to sell, and when a buyer does appear, they often find it hard to get a mortgage.

Property investors often face problems raising the money for wrecks they want to do up and sell on. Buildings with separate flats or shops intended for letting are also routinely rejected by high-street mortgage lenders. And few will even look at properties with unusual legal restrictions.

Birmingham Midshires, the biggest buy-to-let mortgage provider in the country, has strict criteria on the kinds of properties it lends on: "Our buy-to-let lending is calculated on the predicted rental income of the property. BM requires 125 per cent of the proposed mortgage payments to be covered by the rental yield," says its spokesperson Carla Lavender. "In the interests of the borrower and lender, BM does not lend on properties where the rental income is unpredictable, such as non-standard property."

Sticking with standard properties reduces risk and costs, allowing high-street lenders to reduce rates to borrowers, but non-standard or defective properties can represent an opportunity for investors with vision, says Simon Checkley, founder of the financial advisers Private Finance, which last week joined the estate agents Jackson-Stops & Staff. The aim is to provide an alternative source of finance for buyers of the often unusual properties that the up-market agency has on its books.

These currently include a derelict country house near Chepstow originally built by the architect Sir John Soane, an underground house in Kent, and a windmill with a restaurant in Sussex.

Such properties are often rejected by high-street lenders because all the boxes on the form can't be ticked, says Checkley. An extreme example was a client who wanted to buy a house with a wing that was subsiding. "It was uninsurable and therefore unmortgageable," he recalls.

The solution was to legally separate the wing from the main house, so that the lender would not be exposed to the risk. "We created separate titles out of the non-subsiding and subsiding parts of the house, and a structural engineer said that the subsiding part would have no effect on the neighbouring property."

The buyer then paid cash for the subsiding wing and borrowed the money for the main house. "Once the subsidence had been fixed, he sold it at a good profit," Checkley says.

Properties with self-contained flats, shops on the ground floor or workshops behind can also be difficult to raise money on. "We had a nice stone-built property in Chipping Camden with an annexe and a small retail unit, which posed a problem for lenders because if the annexe or the shop were rented out, they may have trouble getting possession if the loan goes bad," he says.

Of course, it was the potential rental income that attracted the buyer. "We put the buyer in touch with a specialist lender, and the shop is now a delicatessen," Checkley says.

Similarly, any property with commercial catering facilities may be suspect in lenders' eyes because it indicates commercial use.

Houses with lower ground-floor flats are popular in London because the flat can be rented out. Checkley advises using the legal ploy of splitting the titles of the house and the flat, so the lender can provide a residential loan on the house and investment loan on the flat. "It can be much more tax efficient because the investment loan is attached to the flat rather than the house. A similar situation applies to houses with land that is let to farmers or rented out as paddocks."

A good example of a "difficult" property is Barnham Windmill, near Chichester, which was a flourishing restaurant until recently, when the lease on the car park expired. Now it is on the market at £895,000, awaiting a buyer who can either negotiate a new car-park agreement or find another use for this landmark building. The agents are Jackson-Stops & Staff in Chichester (01243 786316).

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