Get a bridging loan to buy and renovate a property to sell
Purchasing and developing a property with a view to selling it on can provide healthy returns: if you have affordable finance, buy at the right price, and manage your refurbishment costs carefully.
If you don’t have a significant private funds at your disposal and you’ve found a property that offers scope for you to do up and sell on at a profit, you could be looking for a substantial amount of finance.
The purchase price of the property is often the headline figure that less-experienced developers focus on when assessing the viability of a project.
Equally important will be the cost and flexibility of the funding you’re able to access.
Experienced property developers make use of a variety of different types of finance to achieve their goals, and are aware that their needs may not be best-served by traditional high-street banks.
The problems with traditional lenders' finance
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:
1 Rigid financial products
Typically, traditional lenders offer a limited number of financial products that are geared towards only a handful of circumstances.
The majority of their loan types are well-suited to long-term property ownership, such as residential mortgages. 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.
2 Limitations on property types
The greatest profit margins on renovation projects are to 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.
3 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 which you let out, 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 that portfolio landlords much meet more stringent lending requirements: each and every property in a portfolio must be able to show a profit – the losses on one property cannot be compensated for by the returns on the others.
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.
Get an instant indication of the cost of your finance with Clifton Private Finance’s online Bridging Loan Calculator:
4 Lengthy application process
You will not be alone in having spotted a redevelopment opportunity: experienced property developers are constantly on the lookout 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 being able to secure an identified opportunity is to be able to act quickly.
One of the major problems that borrowers report with high street banks is how long they take to process application. Two to three months is not an uncommon time period for finance approval at the busiest buying-times of the year, and 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 just 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 be needing short-term bridging finance
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 by mortgaging 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:
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 be dependent on your particular project, and your own 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 this will be paid by your sale price or remortgaging.)
Refurbishment loan lenders can offer terms of finance 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 a requirement of any kind of bridging finance, to give both lender and borrower reassurance that the strategy for repaying the loan (such as re-sale within a year) is realistic. Most bridging lenders will contact their borrowers at least three months ahead of the agreed exit date to confirm that the exit can be achieved on schedule.
If an extension is required to allow a sale to be completed, for example, that may be agreed. 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.
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
You project is a light refurbishment if it meets the following criteria:
1 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.
2 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.
3 The purpose of the premises stays the same
If you are just 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.
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 key criteria:
1 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.
2 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 the 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 that you need.
We have strong relationships with specialist lenders, private banks, family offices and wealth managers, who are very willing to fund both light and heavy refurbishment bridging loans. Call us to arrange a convenient time to discuss the property finance you need in detail: