What characteristics of a property could cause a bank to refuse to grant a mortgage?

Although such situations are rare, it may happen that a bank refuses to grant a mortgage due to a factor that is not related to your creditworthiness. When searching websites such as Zoopla or Rightmove to find your next home, there are a few things to bear in mind that could prevent you from purchasing a particular property. In this article, we will discuss these issues and advise you on which properties to avoid.

Why is it important?

If a situation arises in which a bank refuses to grant a mortgage due to the characteristics of the selected property, this usually happens at the stage of the formal mortgage application. This fact has two main negative consequences.

Firstly, when you apply for a mortgage, so-called Hard Searches are carried out, i.e. detailed inspections of your creditworthiness and the property itself. The fact that such an analysis has been carried out is immediately recorded in credit registers and negatively affects your credit score. One of the rules for building a good credit history is to avoid unnecessary hard searches, so if you are able to exclude a particular listing in advance, it is better to do so yourself than to wait for a bank analyst to do it, leaving a mark on your score.

In addition, **rejecting a mortgage application is a big waste of time for everyone involved in the purchase process **— you, your mortgage adviser, solicitor, estate agent and bank. Keep in mind that a formal mortgage application is submitted after preliminary negotiations with the seller and the start of conveyancing. In addition to lost time, such a delay can generate additional costs related to the solicitor’s work and a potential booking fee (i.e. a fee for reserving the mortgage, required when submitting the application).

Of course, unfortunately, sometimes you will not be able to detect the risk early enough — some information may be concealed from you by the seller and only come to light when the conveyancer checks the title deeds or during the property valuation. In this case, you will have no control over it.

However, to minimise the risk of such problems and the loss of time, money and credit score points, it is a good idea to be aware of the factors that can cause a mortgage application to be rejected and to pay attention to them from the outset.

Lending Criteria

Every financial institution in the UK has its own policies, including those relating to lending.

This set of detailed rules and conditions is called Lending Criteria and varies from lender to lender. These rules specify, among other things:

• Methods of assessing a customer’s creditworthiness;

• The value of the property for which a mortgage may be granted;

• The amount of own contributions required;

• The conditions for rejecting applications

and, most importantly, the characteristics of the property for which the mortgage is to be granted.

It is on this basis that bank analysts make decisions on whether to approve mortgage applications. Lending Criteria are publicly available, but their interpretation is quite complex and requires specialist knowledge. For this reason, no one will require you to be familiar with such policies. On the other hand, mortgage brokers are often well versed in them, so if you have any doubts about a particular issue, you can always ask your advisor for help.

Features of the property that are risky for the bank

Non-standard construction buildings

Non-standard construction buildings are houses built using methods other than traditional brick and mortar. This includes several unusual techniques, such as the use of prefabricated elements, steel or wooden frames, or skeleton structures. Banks consider buildings in this category to be risky for several reasons.

Firstly, there may be fewer potential buyers for non-standard construction houses. As a result, if the bank takes over the property and resells it, it may have difficulty finding a buyer or be forced to sell it at a much lower price.

Another risk is faster degradation of materials. In non-standard constructions, especially if they have not been properly secured or are made of inferior quality components, the first problems may appear relatively quickly. Of course, similar defects can also occur in traditional buildings, but there the risk is usually lower, easier to assess during inspection and much easier to repair.

In addition, insurance policies for such buildings are often more expensive and difficult to obtain.

Properties in bad condition

The poor condition of a property should immediately raise doubts. If you see that the house you are interested in shows signs of serious wear and tear, structural defects or other factors that reduce its value or indicate the need for renovation, be cautious. The list of potential problems with the condition of a property is very long, so instead of listing every possible case, we refer you to a very comprehensive article by Notting Hill Surveyors, which details what is worth checking.

If you see in the advertisement that the property has technical defects, there is a high risk that there are more, especially if it is old. If you have doubts about the condition of the property you want to buy, it is a good idea to have the property valued before you apply for a mortgage. An appraiser will be able to determine whether the advertised price is adequate for the actual value of the property and will detect any existing defects.

Banks are reluctant to grant standard mortgages for properties in poor technical condition — there are special mortgage products designed for properties in need of renovation, so if you are considering such a scenario, you should familiarise yourself with them.

Properties with unusual features

When a bank grants a residential mortgage, the basic condition of the mortgage agreement is that the property is to be used solely for the borrower’s residence. This means that the property cannot be rented out (unless on a short-term basis, with consent to let) or used for other commercial or non-commercial purposes.

Due to this condition, **the bank may be reluctant to grant a mortgage mortgage for properties of an economic nature. **This includes, for example, small farms or properties with a residential and agricultural function. Such functions mean that the property cannot be treated as ‘purely’ residential and often make it impossible to finance it with a standard mortgage. However, this is not a strict rule — in some cases, when the agricultural function is very small or symbolic, there are no other farm buildings and, most importantly, the plot is legally registered as ‘residential’ and not ‘agricultural’, the bank may agree to provide financing. Otherwise, an agricultural mortgage will probably be needed.

Another example of such a function is the commercial function of real estate. This means that part or all of the property is adapted for business activities. An example would be a house with a specialised workshop or with a section set aside for a shop or clinic. If you would like to purchase a property with a commercial function, you may want to consider a Semi-commercial Mortgage, a product that combines the features of a residential mortgage and a commercial mortgage.

Short lease expiry period

This feature of the property only applies if it is sold as leasehold. This means that you do not fully own the property, but only acquire the right to use it for a specified period of time. When the lease term expires, you must extend it in order to retain your rights to the property, which often costs tens of thousands of pounds.

For this reason, banks’ lending criteria usually specify a minimum acceptable remaining lease term, often around 70-80 years. This length of lease is safe for the bank because it anticipates that after the mortgage is repaid, it will still have around 50 years to run. Properties with a shorter remaining lease term are more difficult to resell, so if a bank were to grant financing in such a situation, it would expose itself to a large loss.

However, it is possible to agree with the bank that the lease will be extended immediately after the purchase of the house, on the completion date. This is called a ‘simultaneous lease extension’ and requires the terms to be agreed with the freeholder at that time and involves additional costs. If the freeholder and the bank agree, your conveyancer will prepare a contract that will allow you to extend the lease along with the purchase of the property.

Flats in areas with lower market liquidity

When assessing risk, the bank also evaluates market liquidity in a given location. In other words, it checks whether properties in a given district or housing estate are easy to sell. This factor significantly affects the level of mortgage security — if the market is liquid, the bank will quickly recover the money it has lent in the event of a property takeover.

Market liquidity is influenced by several different factors. These may include, for example:

• Distance from large cities, schools or public transport;

• Level of infrastructure development in the area;

• Crime rate;

• Distance from large industrial centres.

If the bank’s appraiser determines that the property may be difficult to sell in a given location, the bank may lower the required LTV ratio, worsen the mortgage terms, or reject the application altogether.

High-risk locations

There are areas on the map of Great Britain with increased geological risk — these are places that are more vulnerable to various natural processes than others. When assessing risk, the bank also analyses the location in this respect and, if it considers that there is a high possibility of damage to the property during the mortgage period, it may require very expensive insurance or refuse the mortgage altogether.

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These include floodplains located near rivers and on the coast. Flooding is a real problem in the UK — according to government statistics, more than 6 million properties are at risk of flooding, which is about 20% of all properties on the islands. If you have a specific address in mind, you can use a government tool to check the level of risk assigned to it. Banks also use these tools, so if it shows that the risk is low, you should have no problem obtaining a mortgage.

Another threat is structural problems, causing, for example, landslides, sinkholes or foundation cracks. Examples of regions where such risks occur are south-west England (Cornwall and Devon) and south Wales.

Very cheap properties

Lending Criteria usually specify the minimum value of a property for which a mortgage can be granted. There is no single, specific explanation for this condition; rather, it is the result of all possible factors that increase credit risk. When the cost of a property is very low, it most likely means that the property is unattractive for some reason — for example, its location or technical condition. By including a minimum property value in their landing criteria, banks further contribute to reducing the liquidity of cheap houses. For example, an old house in a small, poorly connected village, listed for sale at £40,000, is likely to already have little interest among buyers, and the fact that most banks will not grant a mortgage for it further reduces the possibility of a quick sale.

Unusual legal status

Another factor that may influence the bank’s decision is the legal status of the property. These are all restrictions that may affect the flexibility of the property, e.g. the possibility of reconstruction or modernisation, special maintenance requirements or simply an unregulated ownership status (e.g. no clear freeholder).

It is also worth paying attention to properties in conservation areas:

• Conservation Areas – areas of historical or aesthetic significance where restrictions on conversion and modernisation apply;

• Sites of Special Scientific Interest (SSSI) – areas protected for natural reasons;

• National Parks / Areas of Outstanding Natural Beauty (AONB) – also with restrictions on development and land use.

Summary

As you can see, many different characteristics of a property can influence the bank’s decision on your mortgage application. It is good to be aware of them when choosing your future home, so that you can rule out risky options when searching through listings, rather than waiting for the bank to do so during the application process. Remember that many of these factors do not mean immediate rejection of your application, but may translate into a higher down payment, worse mortgage terms, selection of a different (often higher interest rate) mortgage product, or a requirement for higher insurance.