Rupert Gough: The real cost of buying a do-up as your first home

ANALYSIS: When they first start looking, first home buyers tend to search for properties online using the most dreary of all sorts of criteria: lowest price to highest price. Even with house prices turning down a bit, the first rung of the ladder often involves asking the question, “What property can I live with that is in a reasonable price range?”

Inevitably, the lower end of the price range tends to be littered with properties that have less desirable qualities. Some properties will be in a rougher area, and others may have a small section or house size. Eventually, you will get to the larger houses that need renovation. Keywords for these ads might include “original condition” or “needs love”.

These houses can be a goldmine for first-time home buyers who like DIY. They allow a buyer with limited funds to purchase a house or area that they may not be able to get into if the house was in good condition.

From a lending perspective, the banks categorise renovations into three main categories and will lend different amounts to each of these categories.

At the worst end of the spectrum, banks are often unhappy to lend to first home buyers on properties that don’t meet council consent requirements. These past unconsented renovations need to be remedied, and getting a price to bring the entire house up to current council requirements is challenging.

Mortgage Lab's Rupert Gough: "While run-down houses can be tempting, they require a lot of income to cover the mortgage and rental costs." Photo / Fiona Goodall

The next category is houses that require renovations and cannot be lived in in their current state. For derelict houses, buyers may be able to get a mortgage of up to 80% of the land value only and will need to use their funds to do up the house. For the banks lending criteria, they would need enough income to pay the mortgage for the land and rent elsewhere. While the most enthusiastic buyers could live in a caravan on the section, the bank doesn’t view this as a long-term option, so some sort of rental payment must be considered. While these severely run-down houses can be tempting, they require a lot of deposit to cover the renovations and a lot of income to cover the mortgage and rental costs.

The final category is the “ugly home”. A house that needs some non-structural renovations but can be lived in while the upgrades are done. This is the first home buyer’s sweet spot. Banks have no problem with a house that needs paint and carpeting; you can live in this house for years without being required to make the changes. All other criteria being acceptable, a bank could lend up to 90% on an ugly home.

In a typical market, buyers of the third category may be battling against amateur property traders for ugly homes. Professional traders tend to dwell in the second category, where renovations are vast and require a large deposit. But amateur property traders tend to learn their skills on small renovation jobs. The good news is that many of these traders are out of the market due to the increased interest rates and market instability at the moment. So first home buyers currently have less competition in the doer-upper housing sector.

It’s always worth getting a builder to walk through a house that needs renovating to minimise the chance of missing a significant hidden issue. Additionally, if the ad for the property dwells on how much elbow grease is required, the bank may ask for a registered valuation report to satisfy its risk policies. But now seems a perfect time to purchase a house “in need of love” and get onto the property ladder.

- Rupert Gough works for Mortgage Lab and is author of The Successful First Home Buyer.