Finance a major home renovation: how to buy with a bridging loan, then get a mortgage
Don’t let your home renovator’s dream turn into a finance nightmare. We’ll walk you through an example of how to use short-term finance to purchase and do-up, then transfer to a cheaper long-term mortgage.
What do you want to buy?
Our clients were a couple who had found their country-house “project” just outside the town of Codsall in South Staffordshire. It was a traditional red brick Staffordshire farmhouse, with land and outbuildings.
The property was Grade II listed, which means historic charm, but rings alarm bells for finance lenders: owners need to have permissions to do work on listed buildings before it’s started.
What needs doing?
Our couple could afford their substantial property because it was empty and boarded-up. It needed:
- major roof repairs (thieves had stolen the leadwork)
- replumbing throughout (the copper plumbing pipework had also been stolen)
- a new kitchen
Is your property "habitable"?
From a mortgage lender’s point of view, the minimum requirements are that it must have:
- a usable kitchen
- a usable bathroom
- a watertight roof
You may be happy putting up a tent up in the living room and using a bucket and a primus stove. But a lender is concerned with whether the property will find another buyer easily - if for any reason you default on the finance.
Our clients’ property was technically uninhabitable.
What are your finance options?
A long-term mortgage
Our clients came to us looking for a mortgage.
- There were a few lenders who might have offered a mortgage on their farmhouse, especially as they were getting a £50K discount off the asking price of £450K - if they could get their finance in place reasonably quickly.
- But their mortgage rates would have been pretty punishing.
When we reviewed the options we were able to show our couple that a bridging loan first, followed by a mortgage, would work out cheaper – even with the set-up fees for two lots of borrowing.
Short-term bridging finance
Short-term finance secured against the value of this (or another) property is the solution for:
- Unmortgageable (unihabitable) properties
- Houses bought at auction where you won’t be able to get mortgage finance arranged within the 28-day payment deadline
Bridge finance “bridges” the gap to a longer-term finance solution: usually to a conventional mortgage Or to the sale of the property.
Every bridging finance arrangement must have a clearly agreed “exit” at the start:
- Either the sale of the property (including sufficient time within the loan term to allow for marketing and sales completion)
- Or a mortgage, either for your own residential use or as a rental property
- If your exit is a mortgage you will need a Decision In Principle (DIP) from a willing mortgage lender
For a bridging loan on a property that’s your own home, or which is secured against a family home, the terms are regulated to protect you:
- The maximum term of a regulated loan is 12 months (though it may possible to extend)
- The interest on a regulated loan is “rolled up” into the loan, to be repaid with the original borrowing at the end of the term. (Bridging loan interest secured against a property that’s not your home can be “serviced” every month, to reduce the overall cost of the borrowing.)
- Rolled-up interest frees up your cash to spend on renovations. But it does mean the overall cost of the borrowing is higher, because you’re paying interest-on-interest.
- And from the maximum amount that you can borrow, (based on the loan-to-value ratio that the lender will offer you) you need to subtract the cost of the interest to get the amount of money you will have available to spend on your building works.
Our clients had an LTV of 75% on their £450K asking-price valuation, rather than on the actual price they paid. Which gave them enough cash to pay for their purchase, the cost of the works and the interest on the bridging loan.
Finding the right lender
It wasn’t clear whether our clients’ project would be classed as a “heavy refurbishment” loan (usually for major structural works: new walls etc) or a “light refurbishment” loan (at a lower interest rate).
We didn’t want our client to have to pay for a survey by a lender that only does light-refurbishment finance, only to be turned down and have to pay for another survey by a heavy-refurbishment lender.
- We identified a lender that finances both types of work, on an owner’s own residence.
- When the results of the survey came in, we pushed hard for the light-refurb classification: a saving of 0.25% a month for our clients.
How long to arrange your bridging finance for
An experienced finance broker will usually advise you to go for the full 12 months available to you, in case your project runs over timetable. There may be costs to extending a bridging loan.
- Our clients were doing most of their renovation work themselves
- They were starting in October (not the best time of year for roofing work)
- There would be some time lost for Christmas
- They were aiming to have their work completed within seven months
- We arranged a nine-month loan term
- With a lender who doesn’t charge early exit fees
Getting your exit mortgage set up
We stayed in touch with our clients throughout their renovations.
- They only had to do enough work to make the house “habitable”, plus sufficient “refreshment” works to make the house look attractive to a new surveyor.
- As they approached completion of their works two months ahead of their loan deadline, we had their exit mortgage finance set up, to get them off bridge finance rates as soon as possible.
Deciding on the right mortgage terms
Our couple wanted to fix their mortgage rate for 10 years, since this is their forever-home. And dealing with property finance set-up twice in two years is usually enough for any homeowner.
- Rates to secure a longer fix are always a bit higher because of the longer-term uncertainty
- We secured a good deal for them at 2.69%
Watch out for the issues which could throw a spanner in the works
We knew that there was going to be an additional issue for our clients when it came to setting up their mortgage.
Changing title boundaries
Our couple had purchased an additional parcel of land adjacent to their main farmhouse, and wanted to reconfigure the boundaries. They wanted to create two new titles:
- One title with the farmhouse and the new land
- A second title with one of the barns and a strip of land of its own – which can be sold off
So this makes things a little more complicated:
- A current bridging lender won’t agree to a change in the title of the property their lending is secured against.
- A future mortgage lender needs to know exactly what they’re lending against.
The changes all need to be timed for the same completion date.
Plus, we needed to find a mortgage lender who was prepared to consider a change of title, and whose surveyor would value the farmhouse plot not as it currently was, but as it would be with the additional parcel of land, but minus the barn and its new curtilage.
- A simple yes/no valuation would be of very little use to our client.
- We needed a surveyor who would be out there in their wellies with a map of the proposed boundaries in hand.
We sourced a lender who was willing to mortgage on a proposed change of title, who would provide a free valuation, and whose valuer would share their comments with the client.
An inexperienced solicitor
Then there’s the issue of legals.
This lender offered two mortgage products: one with free legal service provided, and the other offering a £500 cashback towards the client’s own legal fees.
We recommended that our clients should go for the cashback deal and instruct a specialist solicitor of their own who they could liaise with directly. This was quite a complicated mortgage set-up:
- with an exit from a bridging loan
- plus splitting the titles
With respect to the solicitors and legal assistants who work for mortgage lenders, this sort of set-up could be beyond their daily experience of straightforward buy-and-sell mortgaging.
Now you’re ready to go…
You can see that using a bridging loan to fund your purchase and renovation works, followed by a mortgage for your long-term property finance, is a bit more complicated than just setting up a straightforward mortgage.
But that’s because we’ve lifted the lid on the kind of considerations an experienced property finance broker should be wrangling for you behind the scenes.
It’s stressful enough managing renovation works – especially if you’re going to be living in the midst of them. Get an experienced mortgage broker on your team to sort out your property finance.
A first call to Clifton Private Finance will cost you nothing, and you'll find out what we might be able to put in place for you:
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