Buying a home with an annexe can be a great way of achieving some additional living space or perhaps a private home office.
The most popular reason is so that relatives can live with you.
Most lenders will be happy to consider properties with annexes, but their lending decision will be affected by how you intend on using the annex.
Read on to see the mortgage options and how a mortgage adviser can help you.
What is an annex?
An annex, or granny flat, typically refers to a separate section of a house or additional building that functions as a distinct living space.
It can be attached to the main building or located elsewhere within the grounds.
Annexes will generally have their own entrances, living areas, kitchens, and bathrooms, making them self-contained units.
Annexes are used for various purposes, such as housing extended family members (like elderly parents), as guest quarters, or even as rental spaces.
They can add significant value to a property and offer additional flexibility in terms of living arrangements.
The annex won’t have it’s own official address, as it is included within the title deeds of the main house.
Not all lenders like annexes
Having a self-contained annex can cause issues for some lenders. They will always assess a property based on how it is to be used and the ease of sale should repossession be necessary.
Annexes can make it more difficult to determine the property’s value. In addition, properties with annexes may appeal to a narrower market segment, which can affect their liquidity and resale value. Lenders always prefer properties that can be more easily sold on.
If the annex is to be let out then there could be issues with tenants in-situ while the bank is attempting to sell the property.
This also causes the property to be classed as ‘mixed use’. This means that it is being used as a main residence and for commercial letting (for money).
In this situation you would most likely need a mixed-use mortgage.
Decide how you will use the annex
Presuming that you will use the main house to live in, you need to be very clear about how the annex will be used.
Will it just be extra space, will a family member live there permanently or will it be rented out to generate an income.
Once these aspects are known then it will be possible to approach some potential lenders. It’s not always possible to get a standard residential mortgage granted, so a more specialist lender could be needed.
Property criteria
These points can affect how easy it is to get a mortgage, or the range of lenders willing to lend.
Construction method
Lenders are always interested in the main method of construction. i.e. What are the walls and roof made of?
If the property is very unusual, or has been built using non-standard construction methods, then a specialist lender will probably be needed.
Size
The size of the annex needs to be proportionate to the main building.
Internal doors
For annexes that are attached to the main building, there are some lenders that need an internal door between the two dwellings. They will be less inclined to help where the annex will be let out to non family members.
Studio layout
If the annex has an open plan studio layout then there may be some lenders who will refuse to lend.
Deeds restrictions
Always check your property deeds. These may include some restrictive covenants about building annexes or letting out part of the property.
Property valuation
The lender will ask their surveyor to visit the property, mainly to assess it’s value.
They will know that the property has an annex, and what your intentions are for it. The valuer will comment on how suitable this would be for the lender and will also be checking the likely rental income against nearby properties.
Borrower’s criteria
As you require a residential mortgage (for your own home), the basic criteria needed for borrowers is pretty standard.
Credit score
A good credit score and credit report will be needed to get the best terms. Although options are available if you have experienced some bad credit.
Age
Your age is important as the lender needs to work out how old you will be when the mortgage term ends. If this takes you beyond age 65 then the lender may want to know how you can maintain the monthly repayments during retirement.
Income
You need to be able to demonstrate sufficient stable income for the mortgage you need. Employees should provide payslips and P60. Self-employed will need accounts and SA302. Lenders will also need to see 3-6 months of personal bank statements.
Debt to income (DTI) ratio
If you have outstanding credit commitments such as loans and credit cards, the lender will want to see how much of your income is spent on these. A debt to income ratio calculates this and a high DTI figure could jeopardise your application.
Loan to value (LTV)
Your LTV is affected by your deposit. A deposit of 10% gives a loan to value percentage of 90%. Having an LTV below 90% can give you a few more lenders to choose from.
Renting out the annex
Renting out an annex can provide a regular additional income.
“How” you can rent it out will be determined by the type of mortgage that you have, so it’s important to know this at the outset.
Lender’s will want to know if you intend on letting out the annex, and who will be occupying it.
The most common options are:
- Long term tenant
- Adhoc Airbnb
- Furnished holiday let
- Furnished serviced accommodation
Some lenders will allow you to include the rental income when applying for the mortgage, potentially allowing you to have a higher mortgage.
How a broker can help
Financing a residential property that has an annex is not always straightforward.
There’s quite a few lenders that won’t be interested at all, it’s just too complicated for them.
An experienced mortgage broker can help you to work out what type of mortgage you need, and then search for the best deal around. They can talk directly to specialist lenders, including those who offer mixed-use mortgages, saving you time and money.
Whether you’re looking to buy a home with an annex, or build a new annex, we can help you find an experienced adviser.
Respect Mortgages can match you to an independent mortgage adviser, who will know which lenders to approach and which questions to ask.
Just give us a call on 0330 030 5050 to get started.
For the most straightforward properties, a 10% deposit is probably sufficient.
This may need to increase if you wish to let out the annex or there is an element of non-standard construction.
You will find more useful information in our: Guide To Deposits
There’s nothing to stop a first-time buyer from purchasing a property with an annexe.
If you would like to add an annex to your current home then you probably need to raise some additional funds. This could be done via a further advance, a capital raising remortgage or a second charge mortgage.
Make sure you seek advice regarding an planning issues or restrictive covenants before you start.
There’s no restrictions on whether you are employed or self-employed.
But self-employed mortgage applicants do have to provide more proof of their finances. This will involve accounts, bank statements, SA302 and tax returns.
Having a joint mortgage with your parents should be possible and is a popular option for many families. It can allow you to pool financial resources and reduce the burden of a mortgage.
This is a question to ask your insurance broker or company.
Certainly if you intend on letting out the annex you will need to tell your insurer. Some insurers may have restrictions on annexes where they are separate from the main house.
