A Complete Guide to Mortgage Retention
Buying a property in the UK is a complicated process and many people find the whole experience stressful, to say the least.
With so many areas to take care of during a typical mortgage application, it can become even more overwhelming when something untoward crops up.
You have done the difficult part, found a property and sourced a mortgage which you’ve applied for but the lender comes back with a decision to retain mortgage funds.
Everything was going well or so you thought and now there is a spanner in the works.
What does it mean when a lender retains funds from your mortgage and what can you do to get those funds released?
This guide takes a comprehensive look at mortgage retention so you can get to grips with it.
Let’s jump in.
What is Mortgage Retention?
The simplest way to explain mortgage retention is when a lender decides to withhold some of the funds from the mortgage to a customer.
Sometimes this can be a partial amount of the mortgage, and in rarer cases, it can be the entire mortgage amount (100% retention).
The reason they retain the funds is normally because there is a defect identified with the property and work is needed to bring the property up to the value it was sold at.
For example, a property may be sold at £300,000 but have a problem with Japanese Knotweed with no treatment plan in place.
In this case, a lender may opt to retain the difference in value between the property with a treatment plan and without.
In almost all cases of mortgage retention, it is because the surveyor has discovered problems with the property that can be fixed to bring the property up to the correct value.
If a problem is identified with a property that can’t be fixed, or won’t allow the property to reach its stated value a lender will in almost all cases decline the mortgage application.
What Can Cause Mortgage Retention?
There are several problems a surveyor can pick up on and relay back to a mortgage lender, which would cause a mortgage retention.
In general, these fall into 6 main areas:
- Roof Disrepair
- Japanese Knotweed
- Asbestos Removal
- Gas/Electrical or Central Heating Problems
- Structural Defects (Foundations/Walls etc.)
Depending on which category your mortgage retention falls into, you will find that different works and timeframes will be in play.
In some cases, a mortgage retention can be a short-term problem that is remedied quickly. In other cases, it can take a long time before you receive the full mortgage funds.
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Mortgage Retention for Damp
If your mortgage has been retained due to damp or mould it is almost definitely not going to be your ‘garden variety’ damp problem.
Where damp and mould can be remedied easily by opening windows, wiping down walls and ensuring good practices are used going forward a mortgage company is not likely to be too concerned.
Damp problems that cause retention are often serious enough to impact the habitability of the property and likely has an underlying cause that can’t be remedied easily.
Sometimes, the underlying problem hasn’t yet been discovered and a mortgage company might be especially concerned about any structural damage excessive damp or mould can cause.
Retention will occur to allow the underlying issue to be fixed and then a report will be conducted to establish the work has had the desired effect.
Mortgage Retention for Roof Repairs
Roof repairs are common in older properties, especially where there hasn’t been much maintenance or repair over the previous decades.
Because a roof prospects the main property structure from the elements, a mortgage lender will want to ensure all repair work is carried out to prevent further problems down the line.
Surprisingly, roof repairs are one of the problems on this list that can be rectified quite easily, and typically retentions in this category are sorted fairly quickly.
Problems occur when the roof has a non-standard construction, and a thatched roof repair can delay the funds being released for a lengthy period.
Mortgage Retention for Japanese Knotweed
Japanese Knotweed is a notorious problem to watch out for during the home-buying process. When you buy a property with Japanese Knotweed you should check that:
- There is a treatment plan in place.
- The treatment plan is sufficient for the level of Japanese Knotweed.
- The Japanese Knotweed hasn’t invaded foundations or structures already.
Once you have satisfied yourself of these areas you should speak to a mortgage broker who can approach lenders that have favourable lending criteria for Japanese Knotweed.
Boon Brokers is a whole of market mortgage broker and we have access to lenders who will consider properties with Japanese Knotweed and a treatment plan in place.
If there is no treatment plan in place or the plan isn’t sufficient to contain the threat of the Japanese Knotweed a lender might retain funds until a plan is put in place.
Typically, this only occurs if the Japanese Knotweed isn’t close to the property.
If the property has a significant Japanese Knotweed problem or it has caused structural damage, the likelihood is your lender will decline the mortgage on that property.
Mortgage Retention for Asbestos Removal
Like roofing, asbestos removal is one of the simpler problems to remedy with companies who are dedicated to removing asbestos.
Though straightforward to tackle the issue, it can be a costly process and your mortgage company may retain funds in these circumstances.
Once the asbestos has been removed, the lender will instruct for a report to check that the work has been carried out correctly and that the asbestos has been removed completely.
If they’re satisfied with the report, they will release the funds.
Mortgage Retention for Gas/Electric or Heating Repairs
Gas and electrical problems can be tricky to remedy, and it might be a time-consuming process, especially if the property needs rewiring or the gas system needs to be made safe.
Because these issues can cause fires to break out in properties, lenders will almost certainly ask that any problems be remedied and retain funds until work is done.
Once the work is completed, the lender will ask for a gas and electrical safety report and may also ask for a gas/electrical engineer to compile a report on the wiring/boiler/pipes.
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Mortgage Retention for Structural Defects
If your property has major structural defects the likelihood is you will be declined a mortgage by your lender.
For minor structural defects like reinforcing a supporting wall and in rarer cases underpinning a property a lender may opt to retain funds.
Structural defects come in all shapes and sizes, and it is hard to say what will cause a lender to retain funds rather than decline it is done on a case-by-case basis and lenders will ultimately be assessing risk.
What is a Mortgage Retention Survey?
If you buy a property with a mortgage a lender will instruct a survey of the property in most cases this is to check:
- The property is valued correctly.
- The property meets the lender’s criteria (i.e. standard construction).
- The property is mortgageable overall.
If the survey comes back with discrepancies, then a lender may ask for a mortgage retention survey.
Mainly this is because they don’t feel the property has been valued correctly and the risk of lending the full amount is potentially too high.
After all, when a lender offers a mortgage, they need to know that in the event that they need to repossess, that they can recoup their money.
A mortgage retention survey can come back in one of two ways:
- The property has the potential to meet the stated value, providing work is carried out.
- The property isn’t valued correctly regardless of any work that may or may not need doing.
If the first result occurs, the lender will likely provide a checklist of work that needs to be completed and retain funds from the mortgage until the checklist is completed.
In the second instance, a lender will likely decline the mortgage.
What is a 100% Retention Mortgage?
In most cases, a lender will only partially retain funds on a mortgage. For example, if they are awaiting the implementation of a Japanese Knotweed removal plan, they may lend £200,000 but retain £100,000 of it on a property valued at £300,000.
In rarer cases, the lender may decide to retain 100% of the mortgage and only make the funds available when all remedial work has been done.
In order to satisfy a lender, a structural engineer’s report is most commonly needed to have retained funds released (although this isn’t always the case as it depends on the issue that caused the 100% retention and another specialist report may be required).
When a 100% retention occurs it can be very costly for you and it is for this reason that getting full structural surveys on any property you’re looking to buy is an excellent idea.
A full structural survey will highlight any issues and help you avoid the buying process going too far to back out.
How do 100% Retention Mortgages Work?
There are typically a few options for buyers who find themselves faced with a 100% retention, although not all of them may be available and it is a case-by-case assessment:
- You may be able to withdraw from the mortgage application.
- You may be able to renegotiate with the seller on the price.
- You may be able to get the seller to remedy the problem themselves.
The hope is the seller will realise that the problem will crop up with any potential buyer as they will legally need to provide this information to all buyers through the TA6 form.
In which case they may offer to carry out the work and you can continue the sale at the agreed price.
The seller may renegotiate the price with you and offer a reduction.
This might seem like a solution that won’t work because your mortgage will still be retained but it is very useful especially if you need a bridging loan to finance the purchase over the time the work is completed, and the funds are released by the original lender.
The renegotiated price would mean that you’re able to borrow less on a bridging loan compared to what you would have been required to borrow at the initial purchase price.
Interest on bridging finance is pretty uncompetitive compared to a standard mortgage, so reducing the borrowing amount helps mitigate the amount of interest that is payable when you exit the bridge.
If you have home buyers insurance or if the process hasn’t gone too far, you may also be able to withdraw from the purchase altogether but this isn’t always the case and you shouldn’t enter a sale believing you can back out at any point.
Requirements for Mortgage Retention
The lender will do one of the following with a mortgage retention:
- Provide the full mortgage funds when you buy the property but with an agreement that the work is completed within a set timeframe.
- Offer a partial amount initially and then pay the final amount when the work has been completed.
- Retain the full funds and stipulate a structural engineer’s report will be needed for them to release the funds.
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What can I do if a 100% Retention Occurs?
If 100% retention occurs, you have a few options but first and foremost you should speak to a whole of market mortgage broker like Boon Brokers.
This is because the options available will vary in different situations and Boon Brokers will be able to advise on the best solution for you.
- You might be able to finance the work yourself.
- You may need to arrange a bridging loan.
- Your broker might be able to liaise with the lender to see if any other options are available.
Which Lenders Offer Retention Mortgages?
Most lenders don’t disclose exactly how they treat mortgage retentions so it is hard to say definitively which lender you apply to will be more favourable in this scenario.
There are a handful of lenders that overlook extremely small defects (up to £2000) and don’t retain funds. These are at the time of writing:
- Leeds Building Society
In most cases, if a retention is needed, a lender will impose it. You can avoid retentions by completing full structural surveys in advance of exchanging contracts and using home buyers’ insurance in some cases.
Using a mortgage broker that can match your desired property with a lender who has favourable property criteria can also prevent issues from arising down the line.
Boon Brokers is a whole of market mortgage, insurance and equity release broker.
Contact Boon Brokers if you need to discuss your mortgage retention or arrange bridging finance today.