With the renovation market booming, it is no surprise that investors are looking for financing for homes and other properties they wish to refurbish and subsequently sell.
In order for a property to qualify for a traditional mortgage, it must be deemed as habitable, meaning the building must be wind and water tight and have a fully functioning bathroom and kitchen.
Since investors generally look for good deals on a property through short sale or auction, chances are the property that is purchased would in no way be considered habitable without some serious renovations, which may also need to be financed.
Since a conventional mortgage is not an option for these types of renovation properties, investors will need to seek out financing for their project using other methods.
When essential items such as modern plumbing and wiring, modern u-PVC double-glazing, and updated gas central heating are not present at a property or home, lenders will withhold funds either in their entirety or in part until these essential items have been remedied.
Unless the investor has his or her own cash flow to work from, chances are he or she will need to secure additional financing in order to make the needed refurbishments to the property. When this situation arises, specialist lenders are available to help fund these projects.
These types of lenders will arrange finance in the form of bridging or other short term loans and have no concern about the property’s state when they extend the financing options. Because of this, bridging finance has become a popular option for those investors looking to refurbish a property.
But, before going out and securing financing, it is important to know a little more about the refurbishment type – there are two types of refurbishment that can be done to a property: light refurb and heavy refurb.
Information on Light Refurbishment
Light refurbishments to a property will generally involve internal work. Internal work can include update fittings in bathrooms and kitchens, re-plastering walls, updating electrical or plumbing work, and even doing simple redecorating. As a general rule of thumb, a light refurb can include any work that does not require any planning or construction consent or change of use.
Loan for light refurb projects is available with standard bridging loan rates which usually begin at about 0.85 per cent per month and up to 50 per cent the property’s Loan to Value or LTV. In some cases, these loans can reach 0.95 per cent per month with an LTV of up to 60 per cent or even 1.15 per cent per month and up to 70 per cent LTV on the property. It is important to note that the percentages and LTV rates listed here are based on maximum gross loan to include retained interest.
Information on Heavy Refurbishment
Contrasting the parameters that outline light refurb, heavy refurbishments include any work that involves planning permissions from the local authorities or change of use for the property. For example, heavy refurb would include conversion of an office building into flats or a public house into an HMO property.
The terms of heavy refurb loans also vary from those available for light refurbs – heavy refurb loans have a maximum of a 65 per cent LTV, although a higher percentage may be available is additional security is available. Rates for heavy refurbs are also slightly higher than their counterparts, usually landing up to 1.45 per cent per month on average.
Since more work is being done to the property, lenders will see this as a higher risk which means the loans will be more expensive to help cover potential losses. When it comes to heavy refurbishments, lenders will often want additional information about the property and project to make sure they are financing a good investment.
Lenders will often ask for a detailed schedule of the construction process for the property as well as a detailed breakdown of costs for the project. Lenders will also take the surveyors comments into consideration especially when it comes to whether or not the scale of money being spent is equal to the work that needs to be done.
Surveyors will often make note of the property’s day-one value and then estimate the value after the work has been completed. Experience in the refurbishment field is vital when it comes to securing a bridging loan that has great rates – lenders will look at an investor’s track record when making a final decision.
Exit Routes Options
Lenders will also take a close look at the borrower’s exit route or exit strategy when it comes to repaying a light or heavy refurb loan and will often require a written exit route as part of the loan’s terms. Generally, when it comes to renovation properties, the exit route will take form as the subsequent sale of the property when the refurbishments are complete.
If this is the chosen route, lenders will further consider the end value of the property when making a decision. Another option for an exit route is refinancing the property in which case the borrower’s ability to obtain a mortgage for the property will be brought into question.
Transitioning the property into an HMO or buy to let property is an additional option, in which case the borrower will need to provide rental coverage calculations to the lender. Bridging loans generally carry the stigma of being the most expensive form of financing.
Although higher interest rates are present with bridging loans, the ability to use them for refurbishment projects before securing a traditional mortgage is a powerful tool for property investors. Since the state of the property is not brought into question with this type of financing, it is usually the only option an investor has when crucial upgrades need to be made to a property in order to secure or mortgage or sell the property outright.
A loan broker can often provide a potential borrower with all the information he or she will need on light and heavy refurbishment finance in order to make the best possible decision for his or her particular situation. Contact Jubilee today and one of our helpful and friendly advisors will gladly help discuss your financing requirements.