What is mortgage retention and what does it mean for you?

What is mortgage retention?

Mortgage retention is when a lender agrees to give a customer a mortgage, but withholds a portion of the funds until essential repairs or improvements have been completed. 

Lenders usually release the full mortgage amount on completion day, but if a survey identifies issues that could affect the value or safety of the property, the lender may retain some of the funds until they’ve received proof that issues have been resolved. 

A mortgage retention doesn’t mean your mortgage application has been rejected or your original offer withdrawn. It just means that it comes with conditions.

Learn more: What to do when the bank says ‘no’

How does mortgage retention work?

Let’s say you’re looking to borrow £250,000 towards your first home.

You get a Mortgage in Principle from a mortgage broker, followed by an Agreement in Principle from a lender, and everything’s looking good.

💡A Mortgage in Principle is a document given by a bank, building society or a mortgage broker, indicating how much you may be able to borrow based on basic information about you and your finances.

💡 An Agreement in Principle (AIP), also known as a Decision in Principle, is a document you get from the lender you want to get a mortgage from, confirming what you could be offered for a mortgage. The amount shown on your Agreement in Principle is not a guarantee of what you will be offered, however, as you will still need to go through the full mortgage application, which includes eligibility and affordability checks.

Then, when you find a property you’d like to buy, you submit a formal mortgage application to the lender. 

The lender sends a surveyor to carry out a valuation on the property, only to find issues with the roof. The lender approves your £250,000 mortgage application but says £10,000 of the loan will be held back until the roof has been repaired. 

If you’d still like to buy the property, you’ll either need to make up the £10,000 shortfall yourself or convince the seller to reduce the price. Then, once the work is complete and the lender has been given proof, they’ll release the remaining funds. The funds will be paid to you, the seller or your solicitor, depending on the situation and timing.

What types of repairs trigger mortgage retention?

Mortgage retentions are rare, and they’re usually only applied to serious issues that impact the value or safety of the property, rather than cosmetic problems or general wear and tear. 

Common causes include:

• Damp or mould
• Structural damage or subsidence
• A roof in poor condition
• Unsafe electrics or outdated wiring
• Boiler or heating problems
• Asbestos or spray foam insulation

What is a 100% mortgage retention?

This happens when a lender holds back the full mortgage amount until major works are completed, but this is extremely rare. A 100% mortgage retention usually only happens when the property is deemed uninhabitable or unsafe, and often follows a recommendation from the surveyor or structural engineer.

In this case, you usually won’t be able to buy the home unless the seller agrees to carry out the work before completion. Unless of course you can find another way to fund the purchase and pay for the repairs yourself.

What can I do if a mortgage retention is applied?

A mortgage retention doesn’t have to stop you buying a home. Here are a few things you can do if a mortgage retention is applied:

Negotiate with the seller

Your solicitor will usually do this on your behalf, working with the seller’s solicitor to come to an agreement. The seller may be willing to fix the problem before you exchange contracts or reduce the price to reflect the cost of the work. 

Get quotes and fund the work yourself

If the retention is manageable and the repairs are straightforward, you might prefer to get quotes from suitable contractors and fund the work yourself. 

Apply for a mortgage with a different lender

You may be able to find a lender who’ll offer you the full mortgage amount without retaining a percentage of the funds. Here at Tembo, we have access to thousands of mortgages from more than 100 lenders -  our average time to mortgage offer is just 10 days!

Make up the shortfall

If you don’t have enough money in savings to make up the shortfall, there may be another way, such as a family assisted mortgage or personal loan.

Before making any decisions, it’s a good idea to speak to a mortgage adviser and potentially a financial advisor. They’ll help you weigh up the costs and risks, while also making sure that any borrowing is affordable and doesn’t stand in the way of other financial goals.

Here at Tembo, we’ve got a number of tricks up our sleeve which could help you bridge the gap between your savings and the amount your lender’s willing to release now.

Walk away

If the retention is large or the property has major defects, you may decide it’s not worth the risk. This can be disappointing, especially if the property seemed perfect originally, but if you keep house hunting and find a home that passes its survey without any issues, you may be glad you walked away.

Learn more: What is affordability?

Do mortgage retentions happen often?

No, mortgage retentions don’t happen very often, but there’s no need to panic if it’s happened to you. A mortgage retention can be really frustrating when it happens, but you may go on to buy the same property or find a better home. You may be surprised at just how many options you have, particularly if you speak to a specialist mortgage broker.