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Refurbishment Finance

What is Refurbishment Bridging Finance?

If a property is in need of works, whether it be a simple modernisation, reconfiguration, extension or conversion, a Refurbishment Finance loan is appropriate.

Traditional mortgage lenders require properties to be in good condition with all the necessary amenities before lending. If you are looking to purchase or refinance a property with no bathroom or kitchen, or in need of significant works before being habitable, or indeed if you are planning to carry out significant works, then bridging finance is utilised.

What is Refurbishment Finance used for?

This type of bridging loan is often categorised by the extent of works required, into “Light Refurbishment” and “Heavy Refurbishment” categories. Generally, heavy refurbishment involves a change of use or configuration of the building, perhaps requiring planning consent and/ or building regulations approval.

  • Light Refurbishment

A light refurbishment project is where the property only requires small improvements, or cosmetic works to an existing structure. This may be as little as a cosmetic upgrade, but could also include a new bathroom and kitchen.

  • Heavy Refurbishment

Heavy refurbishment involves some form of structural change, or a requirement for planning permission, or Building Regs sign-off, and also Permitted Development conversion projects. This can include adding an extension or a loft-conversion, or an internal re-configuration where walls are removed. If planning permission is required for any of the works, it is likely to be considered a heavy refurbishment.

We can arrange a facility to cover the cost of the works in addition to a percentage of the purchase price if a significant amount of works are required.

Refurbishment Finance is also sometimes known as Conversion Finance. This form of finance is usually another type of Short-Term Loan, or Bridging Finance.

A refurbishment loan is usually in 2 parts. The first part will be used to purchase the property, with the 2nd part being used for the refurbishment costs, and that in itself can be split into various “tranches”.

For example, if you had seen a property for sale at £200,000 in an auction, that could be worth £300,000 after spending £30,000 of refurbishment costs, the loan will work as follows:

Initial Advance of 70% of the purchase price, which gives £140,000

This would require a deposit of £60,000, with the lender providing £140,000 towards the purchase.

The refurbishment works start, and after a spend of £15,000 the lender sends out their asset manager to confirm the works have been done. Once this confirmation is received by the lender, they reimburse the £15,000. This process would be repeated for the 2nd£15,000 stage of works.

Typical Scenarios for Refurbishment Loans could include a Below Market Value purchase, due to the property condition, an Auction purchase, where the property is in need of renovation, purchasing and un-mortgageable property (no kitchen or bathroom), or also to raise funds to finish a property when the borrower has ran out of their own funds.

What are the Key Features of Refurbishment Finance?

Typically up to 75% (or even 80%) Loan to Value towards the purchase, then 100% of costs in arrears, subject to 70% of the finished value of the property.

100% funding available, with additional security

Interest rates from 0.4% per month

Loan Terms from 1 month to 24 months

Loans from £50,000 to £100m

Options with no Exit Fees

Rolled up, retained or deducted interest options available

Staged payment facilities available

What are the Refurbishment Finance lending criteria?

Applicants can be individuals, Sole Traders, Partnerships, Ltd Companies, LLPs and SPVs.

Light and Heavy Refurb Products available.

First and second charge lending.

Planning consent needs to be in place.

Loans with no PG’s available.

Lending in England, Scotland, Wales, Northern Ireland and Eire, and even selected European destinations.

Experience is not essential, but does allow access to cheaper rates.

Adverse credit can be considered if the exit strategy is via sale.

What information will I need to provide?

Borrowers details and company name (if applicable)

Property details

Borrowers CV’s/ Biographies to include any relevant experience

Schedule of works, and costs thereof

Proposed contractors/ builders’ details

Copy of planning consent, if applicable

FAQ’s:

What Interest rate should I expect to pay?

Rates can be as little as 0.4% per month, but it really is all “case by case”. Factors that impact on the rate include the amount of cash the developer has put into the deal, the amount of work required, the loan to value, the loan to Gross Development Value (end value, after works), geographical location and the borrowers level of experience, and credit history.

What fees will there be?

Arrangement Fee– This is the lenders loan administration fee and will be added to the loan.

Exit Fees– An exit fee may or may not be charged. Typically these are becoming less common.

Valuation Fees– A RICS valuer will generally be required to value the property on behalf of the lender. The borrower will be required to pay for this valuation.

Legal Fees– These are charged by solicitors to ensure the transaction is carried out properly and registered with the land registry in the correct way.

Can I get all the money at the start?

Unless your initial loan is at a very low Loan To Value, no. Lenders expect you to have carried out some works, before any such costs are reimbursed. So, if you wanted the lenders maximum Loan to Value at acquisition, they won’t advance you any further funds until some works have been carried out, and value added.

What does “in arrears” mean?

The cost of works part of a refurbishment facility will always be provided “in arrears”, meaning after the work is done. So you will need to have carried out some works, to create an uplift in value, to reclaim the cost of works for those works done.

How are Refurbishment Projects monitored?

Some lenders will appoint a 3rdparty valuer to inspect at regular pre-agreed intervals, which comes at a cost, usually per visit. Some lenders have internal “Asset Managers” who charge a one-off fee to cover a certain number of visits throughout the life of the loan.

What if the value doesn’t go up, as expected?

During the underwriting and due diligence stage, a lender will appoint a 3rdparty valuer to appraise the current value, the schedule (and cost) of works, and the proposed end value. It is these values and costs against which a facility will be arranged or capped. Often, at the start of a project, the value can go down as well as up. For example, if a property is being stripped back to brick then the value could decrease before it starts to rise. As such, you should seek advice from a broker as to how best to structure the loan.

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