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Get a Bridging Loan to Buy and Renovate a Property to Sell
Thinking of buying a property to renovate and sell? House flipping can be lucrative, but funding these projects can be an issue. Bridging loans can offer a fast and flexible solution.
If you’ve found a property that offers scope for you to refurbish and sell at a profit but don't have your own funds to cover the purchase price or renovations, you could be looking for a short-term loan to make it possible.
The cost and flexibility of this loan could make all the difference to the success of your project.
Experienced property developers make use of a variety of different types of property finance to achieve their goals, and are aware that their needs may not be best served by traditional high-street banks.
Related: Financing Your Next Property Renovation - Refurbishment Bridging Loans
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Finance from Traditional Lenders
Funding for a Light Refurbishment
Funding for a Heavy Refurbishment
Can Traditional Lenders Help You Buy Property to Renovate?
Despite their visibility and accessibility, conventional lenders like the high street banks and building societies generally don’t offer the fastest and most flexible finance for renovation projects.
Being aware of the potential stumbling blocks in the application process can save you valuable weeks and months waiting for a decision on a loan for which your project is never going to be considered suitable:
Rigid financial products
Typically, traditional lenders offer a limited number of financial products that are geared towards only a handful of circumstances.
Most of their loan types, such as residential mortgages, are well-suited to long-term property ownership. Costed over terms of 20 years or more, this type of mortgage finance isn’t suitable for short-term property ownership and funding of projects that require substantial improvement works.
You’ll find that your type of property doesn’t qualify for their criteria, and you would be faced with hefty early repayment charges of 3% or more if you want to repay the finance within a minimum of two years.
Limitations on property types
The greatest profit margins on property renovation projects can be found by buying very rundown properties that don’t attract buyer interest from owner-occupiers.
Often sold at auction, many of these properties will be considered "unmortgageable" by high-street lenders because they fail to meet the criteria of a property that they would be able to sell quickly in order to redeem their loan amount, should the situation arise.
The common high-street definition of an unmortgageable property:
- It doesn’t have a functioning bathroom or kitchen
- There are "structural issues" which need to be addressed
- It’s very low-value: under £50,000
- It would be defined as "derelict"
If you’re considering buying a property that matches any of these criteria, it’s unlikely a traditional lender will be willing to provide the finance you need.
In-depth portfolio review
High-street lenders commonly set a cap on the number of properties you can own when applying for a loan to limit their exposure.
And they will usually complete an in-depth review of an applicant's property portfolio. These lenders want to establish that you have a track record of successful developments. They also want to assess your financial position in order to make a judgement on whether you can afford the loan repayments.
If you are not only refurbishing properties to sell on but are holding properties that you let out, and if you have four or more mortgaged rental properties, you will be deemed a "portfolio landlord."
Since 2017, the Prudential Regulation Authority (PRA) has required portfolio landlords to meet more stringent lending requirements: each property in a portfolio must be able to show a profit – the returns on the others cannot compensate for the losses on one property.
If you don’t have the development experience a high street lender is looking for, and your portfolio doesn’t show the income stream they require, your application will probably be turned down.
Lengthy application process
You will not be alone in having spotted a redevelopment opportunity: experienced property developers are constantly looking for new sites.
You won’t want to lose potential profit margin by getting caught up in a bidding war, so your only advantage in securing an identified opportunity is acting quickly.
One of the major problems that borrowers report with high street banks is how long they take to process applications. Two to three months is not an uncommon time period for finance approval at the busiest buying times of the year, and it will probably mean that you lose out to another buyer.
In addition, many of the deceased estate or repossessed properties that come to market are sold at auction, for which traditional mortgage finance can’t move fast enough.
The deposit on an auctioned property (usually 10%) must be paid for when the hammer comes down, with the remainder due in (usually) 28 days. This is not a timetable that conventional mortgage finance can adapt to, so you will need short-term bridging finance.
Bridging Loan Calculator
Get an instant indication of the cost of your finance with Clifton Private Finance’s online Bridging Loan Calculator below.
Alternative Routes to Finance
Due to the limitations of traditional lending practices, increasing numbers of developers are turning to specialist lenders to access the type of finance they need.
Finance available: refurbishment bridging loans
A refurbishment bridging loan is designed specifically for short-term use to “bridge” the gap between purchase and repayment – by sale or mortgage on a residential or buy-to-let mortgage.
They can be structured to provide funding for both the purchase and the refurbishment works and have features that are particularly attractive for developers:
Significant funding
Refurbishment bridging finance can provide developers with another way to get substantial funds for their developments.
Some lenders that Clifton Private Finance works with are able to offer refurbishment bridging finance from £50,000 to £25 million.
Naturally, the amount of funding you can access will depend on your project and your financial position.
Flexible interest payments
Typically, refurbishment bridging loans come with the option to “roll-up” the interest to be paid at the end of the term of finance. Deferring the interest payment can allow you to focus your entire loan amount on your purchase and refurbishment costs instead of servicing monthly interest payments. (The total cost of the borrowing will be higher, but your sale price or remortgaging will pay this.)
Bespoke terms
Refurbishment loan lenders can offer finance terms from one month to two years. You will usually arrange for borrowing to extend for the maximum time available to allow for delays and contingencies but with the option to repay early without early repayment charges.
On bridge finance interest is quoted monthly (rather than annually, as for mortgages), and charged daily. You pay for literally the number of days you have had the finance rather than to the end of a month.
Agreed exit plan
A clearly defined exit plan is required of any bridging finance to reassure both lender and borrower that the strategy for repaying the loan (such as re-sale within a year) is realistic. Most bridging lenders will contact their borrowers three months before the agreed exit date to confirm that the exit can be achieved on schedule.
For example, if an extension is required to allow a sale to be completed, that may be agreed upon. Alternatively, a lender may propose an alternative exit plan – a reduced sale price or refinance as a buy-to-let – to reflect changed market conditions.
Related: Home Improvement Loans - The 7 Best Options
Here are some of the rates we've secured for clients recently:
Rates from: Downsizing/Upsizing Releasing Funds From Your Home Short-Term Lease Finance Auction Purchase As at 3rd January 2024 Rates from: Light & Heavy Refurb Finance For Unmortgageable Properties Land Purchase with planning As at 3rd January 2024 Rates from: Up to 80% LTV Minimum Loan £500k Minimum net income £100k As at 3rd January 2024 Thank You for your interest - please complete the form below and a member of our team will be in contact.Residential
Buying Before Selling?
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Large Bridging Loans
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Is Your Project a Light or Heavy Refurbishment?
When you approach a specialist lender for a refurbishment bridging loan, you will need to be clear whether you need a light refurbishment loan or a heavy refurbishment loan.
The costs and arrangement procedures for a light refurbishment loan will be very similar to those of standard bridging finance for a residential property.
The greater risks to lenders of a heavy refurbishment project, where the property may lose immediate value while works are in progress, mean that you will have to take into account a higher interest rate on your borrowing and increased set-up costs (for example, a more detailed survey and valuation).
Funding for a Light Refurbishment
Your project is a light refurbishment if it meets the following criteria:
The works aren’t covered by building regulations
Minor refurbishment works on a property, such as replacing windows, baths or toilets and installing new power points and lights, don’t need to comply with building regulations.
To check whether building regulations apply to the works you plan to undertake, refer to the government website and the Planning Portal.
You don’t need planning permission
Again, if you don’t need planning permission, these are probably light refurbishment works.
For example, if you want to turn an adjoining garage into an additional room, and the works are internal and don’t enlarge the total area of the building, you don’t need planning permission.
Check whether planning permission is needed on the government website and the Planning Portal, and speak to your local council planning department.
The purpose of the premises stays the same
If you are upgrading a single residential unit, you don’t need planning permission.
If the garage conversion you are planning will create a separate dwelling, you will need planning permission.
If you’re subdividing a house into flats or converting a large residential property into a guesthouse, nursing home, or student accommodation, you will need planning permission, and your project will be defined as a heavy refurbishment.
Again, check on the government website and the Planning Portal.
Funding for a Heavy Refurbishment
If your project doesn’t meet the criteria of a light refurbishment you will probably be needing a heavy refurbishment bridging loan.
The cost of the development
If the overall cost of the projected development is more than 15% of the property's value, you will probably require heavy refurbishment finance.
The project requires structural changes
If you’re undertaking a major project, such as converting a large residential property into student housing, and structural changes to the property will be necessary, planning permission is usually required, and the relevant building regulations will apply.
Contact Clifton Private Finance for the Refurbishment Finance You Need
If you’ve found a property you know you can buy, do up and sell at a good profit, we can get you the finance you need. We have an award-winning bridging team who can guide you through your options.
As a whole of market broker, we have relationships with specialist lenders, private banks, family offices and wealth managers who are willing to fund both light and heavy refurbishment projects.
We can find the best deal for your circumstances and are committed to getting results. To see what we can do for you, call us at 0117 959 5094 or book a consultation below.
FAQs
Yes, a valuation is typically required for a bridging loan in the UK. Since bridging loans are often secured against a property or other valuable assets, lenders will want to assess the market value of the property being used as security. This helps the lender determine how much deposit they want you to provide based on the value and condition of the property. You can borrow up to £25m with bridging finance, but it’s typically capped at about 80% of the value of the property you’re using as security. It's important to note that different lenders have varying policies and criteria regarding the maximum loan amounts they offer for bridging finance. Some lenders have a maximum limit of over £1 million, while others may specialize in smaller loan amounts. Additionally, the terms and conditions of the loan, including interest rates and fees, should also be taken into consideration when determining the overall affordability of the bridging loan. Yes, you typically need a 20-40% deposit for a bridging loan. It can be possible to get a bridging loan without a deposit (a 100% bridging loan), but you’ll need other assets in the background to secure the loan against, and more stringent criteria and higher costs could apply. Yes, it is possible to get a 100% bridging loan (also known as a 100% LTV bridging loan), but it is rare. This means that you won’t need to put down a deposit and can borrow the full value of your property. However, the criteria for these loans can be hard to meet, and you’ll need to provide additional assets as security for your loan. Interest rates and fees can also be higher to compensate. While using bridging finance doesn’t technically make you a cash-buyer, it can allow you to act like one. Mortgages take months to process, often leading to an ‘onward chain’ where all parties involved need to wait for funds to be transferred. Bridging finance can usually be accessed a lot quicker than mortgages so you can bypass the onward chain, giving you an advantage over other buyers and being attractive to sellers. Bridging loans typically have a term of 12 months, but some lenders are willing to stretch their terms to 18 months, or even 2 –3 years depending on the case. Terms longer than 2 years will usually only be considered for specific cases. Yes, you can use a bridging loan to pay Stamp Duty. This amount could be covered by a bridging loan, providing you have a way to repay the additional borrowing amount to your lender. Yes, bridging loans are safe when they’re used in the right circumstances with a solid repayment strategy. However, we recommend speaking to a qualified advisor, like our brokers at Clifton Private Finance, before you take out a product. The main factors to consider with bridging finance are that the full loan amount will usually need to be repaid within a year, and like a mortgage, it is secured against a property as collateral. This means that in the case that you aren’t able to repay your bridging loan, your property would be at risk of repossession. But with a watertight exit strategy, bridging finance can be an efficient way to secure property quickly. Bridging loans are designed to be short-term so there’s no maximum age limit when applying for a bridging loan. This does depend on the lender, as some bridging lenders do have an upper age limit, but there are lenders on the market who offer bridging loans for borrowers aged 70 and over. Bridging loan interest rates usually range between 0.45% - 2% per month, depending on the case and the market rate. Unlike mortgage interest rates, bridging loan interest is calculated monthly instead of yearly. This is because bridging loans are short-term and, in many cases, repaid within a year. Bridging loans can be arranged without early repayment penalties, so interest is calculated monthly to ensure you only pay interest on the months you have the loan for. Unfortunately, mainstream banks in the UK don’t offer bridging loans. This means that if you’re looking for a bridging loan, you won’t be able to get one using a lender you’d find on the high street. There are a variety of specialist lenders that offer bridging loans, but because these lenders are smaller and more niche, you may need a bridging broker to access them. Banks typically charge two main fees when taking out a bridging loan – arrangement fees and interest. But there are other costs to consider such as valuation fees, broker fees and administration fees. Costs can vary from lender to lender, and will also depend on what your bridging loan is for (e.g., residential or commercial purposes.) Arrangement fees are what the lender charges you to take out the loan and can range between 1.5 - 3% of your overall loan. Bridging loan interest, on the other hand, is calculated monthly. This can catch borrowers out who may be expecting an Annual Percentage Rate (APR) like with a mortgage. Yes, you can convert a bridging loan to a mortgage through refinancing, and it is common among borrowers who use bridging finance to buy residential properties. However, whether or not you’ll be able to refinance to a mortgage is dependent on your financial circumstances, the lender, and the property you’re planning to buy. It’s important to be sure that refinancing is a viable repayment option before you take out a bridging loan on a residential property. Yes, bridging loans are typically more expensive than mortgages. Bridging loan interest rates can be much higher than a mortgage, and are calculated and displayed as monthly rates instead of the usual annual percentage rate (APR) that you’ll see on a mortgage. However, bridging loans are a short-term solution, and you’ll only pay interest on the months you’ve borrowed money for – and you can repay early without any charges (for most loans). There are many circumstances where bridging loans are an affordable option and a means to an end - for borrowers that need to finance a property purchase quickly, it may be the only option available. The two most common ways to pay a bridging loan are to sell a property or refinance to a mortgage. You may also need to ‘service’ the loan through the term, which means paying the interest monthly. However, you can opt to ‘roll up’ your bridging interest to be repaid at the end along with the capital. There are also other ways to repay a bridging loan, such as selling a business or even using money from an inheritance. The method in which you pay your bridging loan can be flexible, just as long as it is clear in your application that you have a surefire way to repay your loan when the terms are up. In most cases, a bridging loan will require a minimum deposit of 25%. However, the minimum can vary depending on the lender and the specific circumstances of the loan itself. Generally, bridging loans are secured against a property or other valuable assets, and the deposit required is often expressed as a percentage of the property's value, known as the loan-to-value ratio. In some cases, 0% deposit bridging loans are an option, but only if you have other property or assets in the background to provide additional security. No, typically, you’ll repay a bridging loan in one chunk at the end of the loan term. Bridging loans are a form of short-term finance and will usually need to be repaid within 12 months, but there can be room for flexibility. In some cases, borrowers may be required to make monthly interest payments. This means that each month, you would pay the interest accrued on the loan amount while the principal amount remains outstanding until the end of the loan term. But usually, the interest is "rolled up" or added to the loan balance and paid with the rest of the loan at the end of the term. This option can help protect your cashflow so you can spend it on moving costs or refurbishments, for example. Bridging loans can be arranged in as little as 7 working days. However, it depends on the complexity of the bridge loan and your specific circumstances. It may also be more expensive for you to rush an urgent application through – but not impossible. Bridging loans are a popular option for borrowers who are under time constraints, such as buying a property at auction or breaking a chain. The key factors lenders tend to consider are: Security - Bridging finance is usually secured against property or other valuable assets. Lenders will assess the value and marketability of your security. Exit Strategy - Lenders will want to understand how you plan to repay your bridging loan. In most cases, this is selling your old property, selling the new property (flipping), or refinancing with a long-term mortgage. Loan-to-Value (LTV) Ratio - Lenders consider the loan amount compared to the value of the property being used as security as a percentage. The LTV ratio can vary, but most lenders will have a maximum of 60-80% LTV. Remember, the criteria for obtaining bridging finance in the UK can vary depending on the lender and your circumstances.
Do you need a valuation for a bridging loan?
How much can you borrow with bridging finance?
Do you need a deposit for a bridging loan?
Can I get 100% bridging finance?
Does a bridging loan make you a cash buyer?
What is the longest bridging loan term?
Can I use a bridging loan to pay stamp duty?
Are bridging loans safe?
Can an 80 year old get a bridging loan?
What is the monthly interest rate on a bridging loan?
Do banks still do bridging loans?
How much do banks charge for bridging loans?
Can you turn a bridging loan into a mortgage?
Is a bridging loan more expensive than a mortgage?
How are bridging loans paid?
What is the minimum deposit for a bridging loan?
Do you pay monthly payments on a bridging loan?
How long does it take for a bridging loan to come through?
What is the criteria for bridging finance?
