So you are trying to buy a property but the lender has slapped a ‘mortgage retention’ condition on the mortgage offer. Because of this they can’t give you the full mortgage straight away..
The good news is that you do have options, and a mortgage retention needn’t stop you from going ahead.
This guide will help you understand what mortgage retention is, why it happens, and how you can deal with it.
What is a Mortgage Retention?
Mortgage retention is a practice where your lender holds back a portion of your mortgage funds at the start of the term.
Your mortgage offer will be issued with a clause relating to the retention, and what the lender requires.
This usually happens when their surveyor identifies significant but fixable defects in the property you’re buying. For example, if the surveyor finds a faulty roof that could cost £10,000 to repair, your lender might hold back that amount from your mortgage. The funds are then released once the necessary repairs have been completed and verified.
Typically, retentions are imposed for mortgages with a higher loan to value percentage. The higher the LTV, the higher the risk for the lender.
The implications
Mortgage retention can have both positive and negative impacts on your home buying journey.
On the one hand, it can be a financial strain. You will need to find additional funds to cover the repair costs upfront. For instance, if you’re buying a house for £300,000 and the lender retains £10,000 for repairs, you’ll need to find that £10,000 elsewhere until the repairs are done.
On the other hand, mortgage retention can be beneficial. It ensures that necessary repairs are completed, protecting your investment. It’s a way for your lender to make sure that the property value is adequate for the amount they’re lending you.
How does it work?
The lender will send one of their surveyors to inspect the property and carry out a mortgage valuation. Although this is not a detailed structural survey, the surveyor will assess what the property is worth and identify any major structural defects.
If they feel that certain defects are lowering the value, then a mortgage retention could be introduced.
This means that the lender will hold back some of the mortgage money when you get to the completion stage.
Often the lender will insist the works are finished before they send the remaining money, although some may send the full mortgage amount, on condition the defects are rectified within a certain period of time.
If they withhold the money then you won’t be charged any interest on this portion. But this effectively increases your mortgage deposit and you will have to find the ‘missing’ cash from somewhere else.
Should you get your own survey?
Unless your property is a new-build, relying on the lender’s basic valuation can be a false economy.
We would always suggest a Level 2 Homebuyers Report as a minimum starting point.
Where the lenders surveyor highlights areas of concern, you may wish to get additional specialist reports done for these specific areas. For example, a roof inspection for the roof, or a damp survey for identified damp issues.
This way you get a professional opinion, along with costs and timeframes.
Common Reasons for Mortgage Retentions
There are several issues that could lead to mortgage retention.
These include damp and mould, electrical rewiring, removal of toxic materials such as asbestos, structural defects, invasive plants like Japanese knotweed, heating and boiler issues, and roof repairs.
Mortgage funds are only held back in this way where a serious defect has been identified and the amount to be retained will depend on the severity of the issue.
Items like minor repairs or redecoration are not usually enough to make a lender impose a retention.
Quick example
Here’s a simple example of how a retention will affect buying a property.
Mortgage applied for
| Purchase price | £300,000 |
| Deposit | £50,000 |
| Mortgage | £250,000 |
with £10,000 retention
| Purchase price | £300,000 |
| Deposit | £60,000 (+10k) |
| Mortgage | £240,000 (-10k) |
This is what is needed to purchase the property on completion day. The mortgage only pays out £240,000 so an extra £10,000 cash is needed.
Retention removed
| Purchase price | £300,000 |
| Deposit | £50,000 |
| Mortgage | £250,000 |
This is the situation once the retention has been lifted. The lender sends you the retained £10,000, making the total amount lent £250,000 and your cash deposit £50,000.
What are your options?
Lenders don’t impose retentions very often.
But if they do you have three main options:
- Pull out
- Renegotiate
- Proceed
Pull out
If the cost of the repairs is too high, or you don’t have the funds to cover the shortfall. you might choose to withdraw. Keep in mind that you’ll lose the upfront costs, such as mortgage fees, legal fees and survey costs.
Renegotiate
If you still want the property, you could try to renegotiate the price with the seller. Use the survey report to explain the problem, they might be willing to lower the price to cover the cost of the repairs.
Proceed
Alternatively, you could proceed with the purchase and cover the repair costs yourself. In this scenario you would receive the retention money once the lender is satisfied that the issue has been properly dealt with.
100% retention
In very rare cases the lender may decide on a 100% retention.
This means that none of the mortgage money is available until the problem is fully resolved.
Without any mortgage funding, most buyers will pull out from the purchase.
Full retentions are not common but they inevitably mean that the property has serious structural issues, and may be uninhabitable.
If you’ve already agreed a reduced price based on its condition, you may want to push on. Maybe some funds could be raised via a bridging loan, either on this property or another that you own.
Ready to explore your options?
If you’re on the cusp of starting your mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
They will make the process smoother and more profitable than going it alone. And remember, knowledge is power.
The more you know, the better decisions you can make. Keep reading, keep asking questions, and keep moving forward on your journey.
