Bridging For Refurbishment
Morgan Stewart talks all about bridging for refurbishment.
What is a refurbishment bridging loan and how does it work?
In essence, it’s a short term loan to pay for the refurbishment of a property. That might mean a conversion, or taking a tired property and renovating it. Then you might put it on the rental market or sell it on to make a profit.
What are light refurbishment bridging loans and heavy refurbishment bridging loans?
A light refurbishment is where you might redecorate and replace kitchens and bathrooms – the typical turnaround you might see on Homes Under the Hammer. Bridging loans for light refurbs are usually priced lower and you can get a higher loan to value as well – up to 85%.
A heavy refurbishment bridging loan usually involves heavy structural work, such as adding an extension, taking out internal walls, putting in joists, taking chimney stacks out… anything that needs planning approval or building regulations approval.
With heavy refurbishment loans lenders tend to charge you more interest per month and give you a lower loan to value. Certain lenders may allow 75% for heavy refurbishment but 65% or 70% is more common.
Who can get a refurbishment bridging loan?
Most people can get one. We have a lot of clients who use refurbishment bridges, including people wanting to buy a property for themselves to move into. Say a tradesman is looking for a new home for his family. He finds something that needs a bit of work and knows he can add value to it. He can take out a refurbishment bridge loan, renovate the property, move in with his family and create equity from day one, which is a really good strategy.
We also do a lot of business with property professionals. Property investors look for tired, run-down properties where they can make money by renovating the property and selling it. There are also property traders who will look to flip that property on to the resale market and make profit that way.
How much can I borrow on a refurbishment bridge loan?
It depends on the type of refurb. If it’s a light refurb we can go to 85% Loan to Value while for a heavy refurb you’re looking at 65% to 70%. It also depends on the condition of the property – for example, if there are structural issues then bridge lenders may set a lower Loan to Value ratio to reduce their risk in case anything goes wrong.
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How much do refurbishment bridging loans cost and how long do they take to go through?
The fastest bridge we’ve ever completed took just five working days from start to finish, including legals. But you will pay more for the loan to complete within that sort of time frame.
If you have time restraints, you need to have good solicitors on board who understand bridging. You can’t use a standard family conveyancing solicitor. The lender also needs to be able to indemnify the searches from the local council because these can take a long time to come back.
Costs can vary. Bridge rates start about 0.6% a month with a 2% arrangement fee but it can go up to 1.2% to 2% a month depending on the type of bridge. Costs also depend on how you set up the drawdowns and other facilities, plus your credit profile.
How do I apply for a refurbishment bridging loan?
It is possible to go direct to a lender – there’s a lot of bridges out there. But the way we add value is with our understanding of the bridging market.
You need to remember that this type of property finance is completely unregulated. You might find lenders say they can do things within your timescales but not meet them. Others may change the goalposts at the last minute, or reduce your Loan to Value before the day of completion.
But we’ve built good relationships over time with the lenders. We understand what they want, what they’re looking for and the best places to find each type of bridge loan.
Most of us in the business have property investor experience and so we’ve used these products ourselves.
What other advice do you have on refurbishment bridge loans?
With a refurbishment bridge loan, what you need to remember is that the interest is usually deducted from the loan. It’s over a set time. If you’ve got a 12 month term they’ll take 12 months’ interest up front – so you end up with less in your pocket on day one. But not making any monthly payments to the lender is handy when you’re doing refurbishments, because they can haemorrhage cash.
When you borrow money it’s always up to a set loan to value, called GDV – Gross Development Value. The money is released in arrears, so you need to have a pot of cash to do the works.
Once the works are done, sometimes the lender will send a monitoring surveyor to check that you’ve done what you said you would, especially if it’s a large project. If everything is in place, they will release the next tranche of funds.
To make a bridging loan work for you, you need to make sure you’ve got the money for the deposit, plus the money for the works. You need to understand what the payments are going to be, when you’ll get paid and if there’s any cost for that drawdown. That’s what we’re here for, and we’ll explain things every step of the way.