How To Get A Renovation Mortgage

13-March-2018 16:34
in General
by Admin

Getting the right finance in place, can be the difference between a successful and unsuccessful project.

If you are renovating a property there are a number of factors to consider when sourcing finance.

Pre-project checklist

Review our pre-project checklist below to identify the potential costs of your project and accurately forecast how much finance you need.

1) Entire purchase cost of a property

Getting finance in place to cover the asking price of a property.

If you are buying a property to renovate and sell on most lenders will want you to put at least 25% of your own money into the deal.

For commercial property you may have to pay VAT (at the time of writing is 20%).

It should be noted that not every property is subject to VAT. As a general rule, VAT is usually payable on new commercial property sold as a freehold. VAT is not required for the majority of other buildings; however, it is important to double check this before committing to the purchase of a property.

2) Planning permission

If you have designs to purchase a property to develop and sell on for a higher value, then you may need to obtain planning permission.

Although planning permission is not required for every renovation, it should be noted that you will likely need planning permission if you are looking to carry out refurbishment to radically increase the property's value.

You can secure planning permission through the property's local council, which may cost thousands of pounds.

If you are unsure whether you need planning permission for your development, you should check with your local council.

You can even secure planning permission prior to completing your property purchase; this is possible because the planning permission is secured with the property and not the applicant.

3) Unforeseeable costs

There are some costs that are obvious with any project: the purchase price, the refurbishment materials, contractors and administration fees. However, before starting any project, you need to be aware that you will likely face costs that are almost impossible to foresee.

For example, there may be a delay in construction for some reason that could drive up the cost of the project, or you may find that part of the property requires more work than you anticipated.

Unforeseeable costs should be incorporated into your budget; many experienced developers would advise you to add at least a 10% contingency onto your budget to help prepare you for the inevitable unforeseeable costs.

4) Construction costs

Depending on your development experience and your specific project, you may need to review the method you intend to use to carry out the work required.

If you are not well-versed in DIY, then it is advisable to budget for professional assistance. Paying for contractors, builders, plumbers and electricians can significantly increase the amount of finance you need.

You may also find it helpful to accurately review the costs of the materials that renovating a property will require.

5) Market research

Something that is commonly overlooked with property development, especially with new developers, is whether there is a demand for the property in the area you have chosen.

It is all very well and good to develop a luxurious property with a high asking price, but if the property is in the wrong location, you may incur further expenses if it struggles to sell quickly.

It is advisable to carry out market research on the area that you are looking to develop in. You may want to check with the local estate agents to gauge the demand for houses, the average asking price for properties in the area and other potential advantages such as nearby schools and amenities.

Need for finance

Unless you have a substantial amount of capital that you are willing to use on your development project, you will likely require additional finance.

The vast majority of individuals looking for funding for their development will apply through a traditional lender, especially inexperienced developers. However, it is unlikely that a self build mortgage through a traditional lender will be appropriate for a property development project.

Not only will a self build mortgage often be the wrong type of finance, but securing property finance from a traditional lender may not be your best option.

Avoid traditional lenders

The majority of individuals will approach a traditional lender such as a bank or building society, as they are readily accessible on the high street. However, traditional lenders may cause more issues than they are worth.

The problems that you may face with a traditional lender will depend on the type of project you have. Below we explore the issues traditional lenders may cause with property developments.

Rigid traditional lenders...

Traditional lenders will only grant property finance for experienced applicants. If you do not have the necessary experience, then it is unlikely that you will be given the green light.

Traditional lenders and property development

If you apply to a traditional lender for a renovation mortgage, then you should be aware of the following:

Picky about properties...

First and foremost, traditional lenders will not provide a mortgage for any property that they deem unmortgageable.

Bear in mind that traditional lenders will classify the following properties as unmortgageable:

  • Valued under £50,000
  • With structural issues
  • Without a functioning bathroom or kitchen
  • That are derelict

Therefore, if the property you intend to purchase is one or all of the above, then your application to a traditional lender will be unsuccessful.

Lack of urgency...

Typically, an application with a traditional lender will take a long time. It is not uncommon for renovation mortgage applications to take several weeks or even months to process.

It is likely that you will not want to, or cannot afford to, wait for a traditional lender to process your application; any lengthy delay will have an adverse effect on your development project.

Alternative property finance

Fortunately, there is a faster, more straightforward and easier way to access the funding your renovation project needs.

Bridging finance

Bridging finance may be a viable option for your renovation project. A bridging loan is a type of loan designed for short-term usage; it can give you the ability to access a substantial amount of finance quickly. Bridging loans can 'bridge' the gap when there is a shortfall in funding.

Bridging loans are adaptable, and there are different types of bridging loans that are tailored to cater for the specific needs of the project.

For example, bridging loans may be used for the following:

  • Auction property
  • Commercial property
  • Conversions
  • Residential property
  • Self-build property

Our bridging loan service

We work with bridging loan lenders that are prepared to provide the following:

  • Market leading bridging loans from £50,000 to £25m
  • Rates from 0.44% pm
  • Lower rates for £1 million+ loans
  • £99 valuation option for properties up to £1 million
  • Terms from 3 months to 3 years
  • Loan to Value(LTV) up to 80% (can be more if other assets in the background)

Common features of a bridging loan

Although they can be tailored to each project, there are some features that can be found in the majority of bridging loans.

Higher loan to value …

Unlike traditional lenders, bridging loan lenders may be prepared to provide up to 80% of the LTV depending on your personal circumstances. This could save you from using your own capital or approaching another lender for the shortfall in funding.

Flexible interest ...

The majority of bridging loans give you the option to decide when you want to pay the interest on the loan. Most bridging loan lenders will allow you to 'roll-up' the interest to pay at the end of the term of finance. This may be an attractive feature for your project, as you could avoid monthly interest payments and direct all the funding to your project.

Exit plan ...

All bridging loan lenders will require you to have a clear exit plan in place before granting a bridging loan.

An exit plan is the method in which you intend to use to repay the loan at the end of the term of finance. The need for an exit plan can give you peace of mind that the loan will be repaid at the end of the term.

Bridging loans for your project

It is possible to access a bespoke bridging loan that satisfies your financial needs. The type of bridging loan that is best for you will be heavily determined by your project.

Light renovation or refurbishment bridging loan...

Light refurbishment loans are more suitable for smaller projects. It may be difficult to know when to use a light refurbishment loan, but generally they are well-suited to projects where:

  • No planning permission is required
  • Building regulations do not apply
  • There isn't a change to the nature of the premises

Heavy renovation or refurbishment bridging loan...

You may require a heavy refurbishment loan when:

  • Structural amendments are made
  • Planning permission is required
  • Building regulations apply
  • The development costs more than 15% of the property value

Clifton Private Finance

If you have a property that you want to purchase, refurbish and sell on, we can help you.

We have strong relationships with lenders offering bridging loans to cater for your needs.

Through our connections with private banks, specialist lenders, family offices and wealth managers, we can identify and secure the best financial solution for you.

To investigate your bridging loan options, call our team on 0203 900 4322 or use our callback form below

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