Refurbishment finance secrets

Refurbishment finance secrets

Following on from last week’s blog, where I covered development loans, this week I wish to switch focus to the closely related property refurbishment loan..

Following on from last week’s blog, where I covered development loans, this week I wish to switch focus to the closely related property refurbishment loan.

In order for a property to be deemed suitable for mortgage purposes, it needs to be habitable. That is, to be wind and water-tight and to have a fully functional kitchen and bathroom. This rules out conventional mortgage funding for property investors or home-movers looking to purchase properties in need of refurbishment. Furthermore, the absence of things like modern u-PVC double-glazing, modern wiring and plumbing, and gas central heating are all likely to result in a mortgage lender holding what is known as a ‘retention’ – that is the lender withholding funds (either entirely or in part), until certain essential repairs, upgrades or improvements have been carried out.  Unless the purchaser has sufficient cash to purchase the property outright, plus the funds to do the work, then serious refurbishment projects are likely to be off-limits to the average home-mover.

However, there are many specialist lenders and bridging lenders, who are not as concerned about the absence of working kitchens, bathrooms and properties in need of repair or upgrade. Therefore, a short term bridging loan is often the funding solution.

There are two types of property refurbishment, which can be classified as either ‘light refurb’ or ‘heavy refurb’.

Light Refurb

This would typically involve internal works, such as fitting kitchens, bathrooms, re-plastering, decorating, electrics and plumbing etc. To be deemed as ‘light refurb’ the project cannot involve any change of use or require planning consent.
Light refurb loans are available on standard bridging rates, starting at 0.85 per cent per month, up to 50 per cent LTV, from 0.95 per cent per month up to 60 per cent LTV and from 1.15 per cent per month, up to 75 per cent LTV (all LTVs stated are maximum gross loan, to include retained or rolled-up interest and fees).

Heavy Refurb

By contrast, any works that involve change of use (e.g. conversion of offices to flats or a public house to an HMO), and/or any works that require planning permission from the local authority, would be deemed as ‘heavy refurb’.
Heavy refurb loans are available usually up to a maximum of 65 per cent LTV (although higher LTVs are achievable if additional security can be offered). Rates are typically higher, with lenders charging anywhere up to 1.45 per cent per month on such deals.

This short term funding enables experienced property developers and investors to not only fund the purchase of the property requiring works, but also to fund the renovation and refurbishment costs – again with funding being made available for up to 100 per cent of the refurbishment works as well – all subject to available equity in the security property or additional security property.

Where significant works are required, the lender will almost certainly want to see a detailed schedule of works, with a list of the break-down of costs for the proposed works. The surveyor will also comment on whether the intended spend is realistic and also whether the time-scales are realistic as well. They will often comment on the day one value (pre-works value) and then the GDV or post-refurbishment works value. As per development loans for new-build construction, experience is vital. The lender will look for evidence of past experience, a proven track record and ability to get the job done within budget, on-time and get the loan repaid, by either sale of the property or refinance to a conventional buy to let or residential mortgage.

Exit route is key

The intended method of repaying the development or refurbishment loan must be clearly evidences from outset. The short term funder will insist on this as a pre-requisite when considering their own loan. Exit is usually via sale or refinance. If sale, then they will consider whether the estimated sale price, demand and time-scales are realistic, to ensure the loan is repaid before the end of the bridging term. If the exit is refinance, then the borrower’s ability to obtain the mortgage finance will need to be evidenced, before the short-term loan is taken out. This is usually by way of an agreement in principle from a ‘traditional’ lender. If the exit is a buy-to-let mortgage, then the likely rental achieved from the property will need to be taken in to account to make sure the deal stacks up on the exit lender’s rental coverage calculations (usually 125 per cent of interest only mortgage payment).

As per development finance loans (discussed in last week’s blog), refurbishment or renovation loans can be set-up so that that funds can be drawn-down in stage payments. Usually a facility fee will be charged on the whole loan facility (typically 2 per cent added to the advance on completion) and then interest paid on the funds only once they are drawn-down. In most cases, there are no exit penalties or ERCs, which means as soon as the property is finished and ready to be either sold or refinanced on to a residential or buy-to-let mortgage, the refurbishment loan can be repaid without penalty.

Despite the perceived higher interest rates and costs associated with bridging loans, when compared to traditional mortgage lending, these features combined make it a very powerful tool and one that serious property investors and developers are utilising to make money from property renovation, refurbishment and development.

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