Does house value impact borrowing power?

Snakeweasel

I am going through the process of having a property transferred to me. Part of this requires an auctioneer valuing the property. When i was speaking with my bank about borrowing to renovate and extend, they asked me for a rough estimate of the value of the property and costs to renovate/extend. They said that based on my estimated property value, they would have no problem lending me 100% of my estimated renovation/extension costs through an equity release loan.

If the actual auctioneers valuation of the property comes in significantly lower or higher than my estimate, would this impact how much the bank would be likely to lend?

phormium

No 1 criteria for lending is ability to repay with value coming next, the bank probably has an upper limit on loan to value of borrowing but could be up to 80% so the value does matter. But even no matter how high the value is your income dictates the max amount they will lend in relation to the value. Now if it's way lower then it just depends how much you want to borrow in relation to that value.

Snakeweasel

https://www.boards.ie/discussion/comment/118702824#Comment_118702824

My estimated costs were nearly double my estimated value (neither were high) my salary would be comfortable for repayments. I was just concerned when it didn't sound like a standard self build or first time buyer mortgage, so I didn't really know how they calculated what could be loaned. They mentioned something in passing about basing it on either the value of the property after the work or the current value plus price of the work, which ever was lower.

phormium

If you were buying a house that needed work and taking out a mortgage, an ordinary buyer for example, then depending on cost of both there are options.

For example buying a house for 100k worth 100k and wanting to borrow for it plus do some works for 50k then you are limited initially to borrowing 80% of purchase price, the only way to get more is to apply for a mortgage for purchase plus renovations so total mortgage needed is 80% of pp/value plus cost of works 50k. Assuming then that a valuer says that the house plus completed works will be worth a minimum of 160k then you can borrow 80% of that figure which is 128k which gives you the 80% of pp to complete purchase and practically enough for the renovations. This will just be issued piecemeal though, initial 80% to enable you make the purchase and the additional works in stage payments when completed.

Now in your case you have no initial purchase price so if value now of house say is 100k then your maximum mortgage is 80k, if your renovations fall below that happy days, if not then the bank is going to have to look at what the value will be when the renovations are completed so if the renovations cost 100k and existing house is only worth 100k at present then you can't get the full 100k so will have to go for a mortgage based on a finished value of 200k (100k existing value plus updated value after works) and borrow your 100k against that value.

It's a more complicated way but necessary if the value isn't in the house initially, again the bank will only let you draw that down in stage payments and if planning permission is required for the works that will have to be in place before drawdown. It's not unlike building a house from the banks point of view so you will need all the regs/permissions/sign off etc in place. Now you should have those anyway but bank won't care about them or get involved if the amount you wanted was below the amount they are willing to lend on the existing value of the property.

Snakeweasel

https://www.boards.ie/discussion/comment/118703282#Comment_118703282

Thanks for such a detailed response. That makes a lot more sense and must have been how they were calculating things. Based on my own estimations, the auctioneers value of the property would have to be substantially lower (approx 33% lower) than my already low estimate, which I really couldn't see happening.