Bridging for Refurbishment

What is a refurbishment bridging loan? How does it work?

It’s a very similar product to the original bridging loans you may have seen before. This one is just coupled with some additional finance.

Most people will use bridging for refurbishment to buy an asset, maybe at auction, or maybe they already own a property which needs some work. A bridging lender will give you a day one loan to either replace your existing finance lender or as a brand new finance deal.

A standard Loan to Value on a bridging loan is 65% although some go to 75% or even 80% – although there is a cost associated with that. The more money you want, the more it’s going to cost. We can cross charge if you already have a portfolio of properties with available equity, to get a higher Loan to Value.

It’s the refurbishment part of the loan that’s the key part for today’s discussion. You need to be clear whether you’re doing a light or a heavy refurb. Light refurbishment means carpets, a new boiler, new kitchen, new bathroom and decorating – nothing structural. Light refurbishment products are cheaper as you’re usually going to turn the work around in a faster timescale.

A heavy refurbishment is structural, where you’re changing internal wall structures such as adding an extension or doing a loft conversion. A heavy refurbishment product is priced slightly higher because there’s a risk of you walking away half through the project, in which case the lender has to finish the property. On a light refurb there’s less to do to resell that property.

Who is a refurbishment bridging loan for?

It’s for anybody that wants to do any work to a property. Most people don’t really read the terms of conditions for their residential mortgage or Buy to Let product, but in almost all cases they will say that you cannot do any work to the property inside the term of your product.

So if you do want to update the kitchen or the bathroom, technically you shouldn’t do that within your mortgage term. Most people disregard that and lenders don’t really fuss about it.

But for people looking to really make large gains to the value of their properties they need to take the property out of the rental market for a while or move out of their own homes. If the property’s uninhabited for some time, a bridging loan is an ideal product. It allows you to really get in there, tear the property apart and put it back together in a much better state.

How much can I borrow with bridging for refurbishment?

Generally speaking, probably 65% or 70% of your day one loan, which is either the purchase if you’re buying or to replace your existing lender if you already own the property.

Then, it’s 100% of your refurb costs in almost all cases, unless the numbers are very unusual. If you want to do £30,000 worth of work, the lender will cover all those costs.

Every month, or every two or three months depending how you want to break down the loan, you pay for the work. You go back to the lender regularly with invoices for the work completed for a refund. Then you do the next tranche of work to the property and they cover your costs in arrears.

You pay interest on the borrowing as you draw it down through the loan. A factor to consider is the gross development value – the GDV. If you’ve purchased a property for £100,000 and plan to do £50,000 worth of work to it, it needs to reflect a decent value afterwards. If it’s only worth £150,000 in the end you’ve not really created any equity.

But if the completed property is worth £200,000, there’s a clear profit margin. That makes the numbers much easier for a lender to swallow and price the product for you.

How much do refurbishment bridging loans cost?

The Loan to Value on day one will reflect your pricing. Interest is generally between 0.5% and 1% per month, although your credit, the condition of the property and its location will potentially affect that.

Drawdowns should then be priced at the same rate as your day one. So if there’s £50,000 worth of work to do, the lender will set aside £50,000 for you. If you draw £10,000 every two months you’ll start paying interest on that for the rest of the term – you only pay for what you use.

Some lenders, depending on the level of work, will want a surveyor to come out. If you’re doing heavy refurbishment, before they release some tranches they will want a structural engineer to come and see the work. They check it’s being done to a certain standard before covering that cost. Surveyors can cost a couple of hundred pounds a time. That cost would be outlined at the financing point.

How do I apply for a refurbishment bridging loan?

This is the same as any other bridging loan. They all come under the same umbrella, but some lenders do some things better than others. For refurbishment lenders, some will just have a better understanding or will give you more leverage against your property.

To apply, come to us with your project. Explain what if you’re trying to achieve, the numbers involved: what the property is worth now, what the debt currently is and what the expected value is. Once we’ve got those details we can narrow down the lending choices for you and then make that application.

What else should we consider with a refurbishment bridging loan?

Refurbishment is a fairly simple process but the biggest thing to consider is the total GDV or the yield. If you’re looking to retain a property then you’ll be looking at the overall profitability and growth in value. If the property is going to yield 80% or 90% you’ll make your return, but if you’re in the south or southeast your yield is going to be low, regardless of what you do with the property.

So you need to consider the amount of work and how much money you will make on top. Ideally, you want to be making a return or growth in that property that’s higher than the cost of the building works and the loan.

It’s really important to understand the numbers beforehand. A lot of people go into an auction, buy a property, start the refurb and by the time they finish they’ve put far more work into it than they expected. They’ve come away with a build cost that’s far higher than the actual uplifted value. It’s also important to have a good builder that gives you good solid quotes up front.