How To Get A Refurbishment Loan To Buy And Sell A Property
The property development market is booming and, if done correctly, buying a property with the view to refurbishing and selling it on can provide healthy returns. Property developers usually fund their projects through using a combination of proceeds from sales of previous property developments, personal capital or additional finance from a lender.
If you have purchased a property and want to refurbish it to increase its value, unless you have a spare capital available, then you may require third party funding from a lender.
The Trouble With Traditional Lenders
For many property developers, the first port of call could be a traditional lender such as a high street bank or building society; the common misconception is that traditional banks may offer the fastest and easiest way to the finance they need.
Property refurbishment finance is not a type of finance many high street lenders offer. Most high street lenders are focussed on the long term residential mortgage market and do not offer short term finance products.
Potential delays …
Approaching a traditional lender who can help may not be your best option to source the funding you require for your refurbishment project.
Why? From our experience traditional lenders timescales are often aligned with residential mortgage timescales so from start to finish you can often be looking at a number of months before finance is made available assuming everything goes to plan. This could result in lengthy delays and possibly increase the overall cost of your refurbishment project. Any delay in securing finance is frustrating, but when it can potentially have an adverse effect on your project it can change the entire complexion of your development and bottom line.
Portfolio issues …
It also should be noted that traditional lenders will often review a property developer’s portfolio. This is to ensure that the developer has a track record of successful projects and to scrutinise the developer’s financial position to ensure they can afford the loan repayments. Therefore, if you do not have the necessary experience or your portfolio is not as strong as they would like, you may not be given the green light - this decision process can take weeks.
Property restrictions …
One way of potentially maximising the return on a refurbishment project, is to purchase a property in disrepair and bring it up to living standards. Many developers utilise this method by buying lower value houses on the market or properties at auction; these properties are sometimes in such bad condition they are deemed unmortgageable properties. The issue here is that traditional lenders will not provide refurbishment loans for unmortgageable properties.
Unmortgageable properties …
To save you time and help you avoid being turned down by a traditional lender, unmortgageable properties are those:
- Valued under £50,000
- With structural issues
- Without a functioning bathroom or kitchen
- That are derelict
Finally, traditional lenders usually set a cap on the number of properties you can have when applying for a loan. This may restrict your borrowing options if you own multiple properties.
Alternative routes to finance
The restrictions traditional lenders impose often can cause problems and force borrowers to seek out alternative sources of finance.
If you have a property that you want to refurbish and sell on, but you either cannot satisfy traditional lenders’ criteria or you want to avoid the lengthy application process, you may be able to get the finance you need from a refurbishment loan.
A refurbishment loan or bridging loan is a loan designed solely for short term usage and can ‘bridge’ the gap where there is a shortfall in funding. A refurbishment bridge loan may be an attractive option for finance, as it has the ability to provide a significant amount of finance in a short period of time.
Although the features of a refurbishment bridge loan will change from lender to lender, generally you can expect to benefit from the following features.
The advantage of using a refurbishment loan is that they can be used for a number of different purposes.
Refurbishment bridge loans are often used for the following:
- Auction property
- Commercial property
- Residential property
- Self-build property
Substantial funding …
Refurbishment bridging finance gives developers another way to access the finance they need. There are some lenders that are prepared to grant refurbishment bridge finance from £50,000 up to £25 million. Your ability to access the higher end of refurbishment bridge finance will be heavily determined by your personal circumstances.
Flexible terms of finance …
Refurbishment bridge loans are typically used for short term purposes. The majority of refurbishment bridge loan lenders are happy to agree terms of finance up to 24 months. This may suit your property refurbishment project, as it gives you enough time to complete your refurbishment without tying you into a long term loan agreement.
Exit plan …
You will need to have a clear exit plan in place to access a refurbishment bridge loan. An exit plan is the method you intend to use to repay the loan at the end of the term of finance. An example of the exit plan you could use is using the proceeds of the sale of your refurbished property to repay the loan. The requirement of an exit plan helps to give both the lender and the borrower peace of mind that the loan will be repaid.
For the speed and convenience of a refurbishment bridge loan, there are some lenders that are prepared to provide refurbishment bridge loans with interest starting from 0.55% per month.
Types of Refurbishment Loan
If you approach a refurbishment bridging loan lender, you will usually be offered one of two types of loan. The type of refurbishment bridge loan that you are offered will depend on your personal circumstances and the purpose of the loan.
Light Refurbishment Loan
A light refurbishment bridge loan is often utilised for smaller projects. The difficulty some people have is determining whether their project is a light refurbishment or not.
No planning permission is required …
One tell-tale sign that a light refurbishment bridge loan is appropriate for a project is whether planning permission is required. A sure-fire way of making sure you do not need planning permission is to check with the property’s local council.
Building regulations do not apply …
Light refurbishment bridge loans can only be used when the building regulations do not apply.The majority of smaller tasks in a property are not applicable to the building regulations. As a rule of thumb, the building regulations do not apply for work such as:
- repairs, replacements and maintenance work (except heating systems, oil tanks, fuse boxes and glazing units)
- new power and lighting points, or changes to existing circuits (except around baths and showers)
- replacements of baths, toilets, basins and sinks
You can find more information about whether the building regulations apply to your project on the government website.
There isn’t a change to the nature of the premises …
A light refurbishment bridge loan would not be appropriate for a refurbishment project that would ultimately change the nature of the premises. For example, if you intend to refurbish your property to make it suitable for a commercial business then a light refurbishment bridge would not be appropriate.
Heavy Refurbishment Bridge Loan
If your project does not fit in the light refurbishment category, it is likely you will need a heavy refurbishment bridge loan.
Structural refurbishment …
Lenders will typically deem any structural amendments as heavy refurbishment. This is because the cost of a structural refurbishment will normally be more expensive, planning permission is often required and the building regulations usually apply. If you intend to make any structural changes to the property before selling it on, you will likely need a heavy refurbishment bridge loan.
Cost above 15% of property value …
A heavy refurbishment bridge loan will usually be offered if the project costs more than 15% of the value of the entire property. This is a useful rule to help decipher whether your project needs a light or heavy refurbishment bridge loan.
Refurbishment Loan Lenders
It is unlikely that you will be able to find a refurbishment bridge loan on the high street. This is because typically traditional lenders will not offer this type of specialised loan and, useful tools such as, comparison websites will not feature them either.
Refurbishment bridge loan lenders often will work through intermediaries such as professional brokers. Therefore, if you want to access a refurbishment bridge loan, it is advisable to contact a specialist broker.
Clifton Private Finance
At Clifton Private Finance, we have experience in assisting clients who need additional funding to complete their refurbishments and reach their goals.
If you have a property that you want to refurbish and sell on, we can help you.
We have strong relationships with lenders offering both light and heavy refurbishment bridge loans. Through our connections with private banks, specialist lenders, family offices and wealth managers, we can identify and secure the best financial solution for you.