Refurbishment loan
Refurbishment loan products are available to investors and homeowners looking for funding towards the purchase price and works of a residential property. Refurbishment loans are a form of short term funding that can be used to buy properties that aren’t habitable, or to just improve the condition of a property. Our clients use these products to renovate buy to lets, HMOs and even their own home! At Mortgage Lane we specialise in refurbishment loans, offering market leading products with speed of application for a swift completion.
PROCESS BREAKDOWN
Information gathering and advice
The first process in your refurbishment loan application will be gathering or updating information in relation to the property, tenants, or yourself. Once this has been established your expert refurbishment loan broker will make a product recommendation.
Credit approval
Once you are satisfied with the product recommended and have confirmed to proceed, this will usually be submitted the same day to give you a decision, until this point there is still nothing to pay! As long as the Agreement in Principle (AIP) was approved, we can move to application stage where fees become payable.
Application, valuation & underwrite
Once the application is submitted, your valuation will be booked in and most of the time (depending on the lender). This will usually completed once your initial underwriting has been completed. Once the valuation is returned, if acceptable, the lender would then look to make a formal offer. You can then move to legal stage.
Offer and completion
Once you have had your refurbishment loan offer, you will require adequate legal advice, your solicitor can draw this down once the legal requirements are satisfied. Your broker at Mortgage Lane will always be checking in on the application post offer, so we are chasing for you too!
How much can I borrow?
Refurbishment loans allow for the purchase of a property and an additional loan towards the refurbishment of a property. There are two types of refurbishment loan products on the market, enhanced bridging which will fund 85% of the purchase price where the borrower will fund the light refurb themselves. The second type of refurb loan is a development facility where a lender could fund up to 75% of the purchase price and 100% of the build costs, this is usually more suitable for heavy refurbishments that may require structural alterations or extensions.
Lenders will consider the following when assessing lending on a renovation project:
- Loan to Gross Development Value LTGDV / end value (usually lenders will not lend more than 75%LTGDV)
- Loan to Cost (usually lenders will not lender more than 90%LTC of the cost of the project)
- Profit on cost (usually lenders require a minimum of 15% POC)
Refurbishment loans for Property Investors
At Mortgage Lane we are specialists in refurbishment loans, assisting property investors to acquire buildings to renovate and to convert for change of use. Refurbishment loans can be used for a variety of scenarios:
- Refurbishment loan for Multi unit freehold block (MUFB) conversions
- Refurbishment loan for Auction purchases
- Refurbishment loan for HMO conversions
- Refurbishment loan with no experience
- Refurbishment loan for Guest house
- Understanding refurbishment loans
- Refurbishment loan for Holiday let
Development loans aren’t just available for group up schemes, we can use them for refurbishment products on houses and flats, or even commercial to residential schemes. They usually offer up to 75% of the purchase costs and often 100% of the works cost, funded in arrears. Please see our FAQ section of how drawdowns are taken by borrowers in arrears using a JCT minor works contract.
While short-term funding typically involves increased risk due to shorter terms and uncertain exit strategies, we also have access to light refurbishment mortgage products that are designed to mitigate these concerns. These lenders offer an initial loan-to-value (LTV) of 70-75% of the purchase price on day one. This provides a solid foundation for your financing needs.
How does the revaluation process work, and what benefits does it offer?
After completing the required refurbishments, our original valuer will reassess your property. If eligible, you can receive a further advance of up to 70-75% of the Gross Development Value (GDV), after accounting for the original loan. This reassessment not only reflects the enhanced value of your property but also potentially lowers your overall borrowing costs.
What assurances do I have regarding the property’s value and exit strategy?
Our process offers added assurance regarding your exit strategy. During their initial visit, our valuers provide a GDV estimate, which represents the end value of your property after the scheduled works are completed. By following the Schedule of Works, you can anticipate this GDV valuation to be confirmed, providing clarity and confidence right from the start.
What additional costs are avoided in this process?
By choosing the refurbishment mortgage product, you avoid the need for a second payment of broker and legal fees. This streamlined approach not only simplifies the process but also contributes to the overall cost-effectiveness of your project.
While mortgages can often be more cost-effective compared to bridging finance, they typically involve more complex underwriting and a slower processing speed which borrowers buying at auction should be mindful of.
Refurbishment loans are specialised financial products designed to cover the costs of both purchasing and renovating a property, or a proportion of the refurb costs. They accommodate a wide spectrum of refurbishment needs, from minor updates to major renovations. While some lenders might require borrowers to demonstrate previous refurbishment experience for larger projects, others offer more flexibility.
In terms of financial specifics, these loans vary, some provide a Loan to Value (LTV) ratio of up to 85%, encompassing refurbishment costs.
Clients should be aware that refurbishment loans involve detailed underwriting for the renovation aspect, which can impact the processing speed of the application.
QUESTIONS ABOUT REFURBISHMENT LOANS
With Refurbishment Loans, the approach towards local searches can vary. While local searches – which can take anywhere from 2 to 18 weeks depending on the local council – are a standard part of property transactions, some lenders may offer alternatives for refurbishment projects.
In many cases, lenders may accept an indemnity policy as a substitute for local searches. This policy serves as a safeguard against any issues that would typically be uncovered during a local search, such as planning permissions or local authority notices that could affect the refurbishment project.
Borrowers seeking to expedite their refurbishment loan process should consider lenders that are open to using indemnity policies. This option can significantly reduce the waiting time usually associated with local searches, thus facilitating a quicker start and completion of the refurbishment project.
It’s important for borrowers to discuss with their legal advisors the implications of opting for an indemnity policy. This ensures that they are fully aware of any potential risks and that the policy meets the specific requirements of their refurbishment project.
No, whilst the more competitive lenders may require some experience, there are many lenders that will not require any experience for a refurbishment loan even for heavy works!
Yes, some refurbishment loans will fund 100% of the works cost.
This is usually subject to the gross loan not exceeding maybe 75% of the end value or GDV. As well as this measure of maximum loan, lenders will also want a minimum of 5-10% “skin in the game” or funds/equity provided by the applicant. In lenders terms, Loan to Cost (LTC) should be no more than 90-95%.
Some lenders will allow the 5-10% equity piece to be funded by a private investor.
Lenders will also be concerned about the profitability and therefore some lender may have minimum profit on cost measures, such as 15% for example.
As long as these measures stack up, the lender may lender 100% of the works in arrears.
So if you have a project with works totalling 100k, then this will be split into phases usually. If a lender has a minimum drawdown of £25k which is common, then the maximum draws can be 4 at 25k a piece. Of course each draw down will incur professional fees, so we can max the draw down amounts to reduce the cost of borrowing.
Usually applicants either forward fund their schemes, or have their builder fund the first phase under a JCT or minor works contract.
Refurbishment loans are designed to finance both the purchase and the renovation of a property. These loans cater to a range of refurbishments, from light to heavy. For more extensive projects, some lenders may require the borrower to have prior refurbishment experience, while others may be more flexible regarding this requirement.
There are various products available in this category. Some offer a higher Loan to Value (LTV) ratio, up to 85%, which includes the refurbishment costs. Others might provide a loan covering 75% of the property’s purchase price, with an additional 100% financing for the renovation expenses.
However, it’s important to note that while these financing options can be attractive for profitable projects, they may not always be suitable. This depends on the projected profitability of the deal or the Loan to Gross Development Value (GDV) ratio. Some projects may not yield enough profit or have a sufficiently high GDV to make these financing options viable.
Refurbishment loans usually span from maximum terms of between 12-36 months. Of course, they are a cost of doing business when you are refurbishing a property, but with profit involved many applicants seek to exit these products in good time.
Refurbishment Loan lender usually have a minimum term of between 1-3 months, so when your refurb is complete, you can exit immediately after that.
Specialist lenders offering refurbishment loans often will have a closed legal panel, meaning that they will dictate which lenders can act for them. You would select from a list of solicitors who will act for the lender and potentially you also. Joint representation is sometimes offered where the chosen solicitor’s firm can also act for you. Some lenders closed panel will be just sole representation for the lender and you will then be able to use your chosen solicitor additionally subject to eligibility. It is key to know that with sole representation, there are two legal fees to pay.
No
Although if your proposed exit from the refurbishment loan will be remortgage, the lender will want to be comfortable you have enough income to exit onto a mortgage lender.
We arrange cost-effective refurbishment loans for:
- Individuals
- Special Purchase Vehicles/Limited Companies
- Limited Liability Partnerships (LLP)
- Trading companies
- Charities
- On/Offshore Trusts
It is important to note that Refurbishment loans are not covered by the Financial Services Compensation Scheme, so borrowers should ensure they are dealing with a reputable lender. However, residential borrowers looking for renovation loans may find regulated products available with self build mortgages.
Refurbishment loans are a form of short term funding. Therefore they are charged on a monthly, interest only basis. Unlike mortgages that are charged annually, borrowers will need to be mindful to multiply their short term lending rates by 12 to compare pricing to mortgages.
From here, borrowers have the option to either service or deduct interest for the term.
Serviced Interest
In a serviced interest arrangement, the borrower pays the interest monthly.
This option can be beneficial if the borrower has a regular income stream and prefers to manage their cash flow by paying interest as they go. It helps in maintaining the principal amount of the loan, as the borrower is actively paying off the interest.
Borrowers need to ensure they have the necessary cash flow to make these monthly interest payments. It’s essential to plan for these expenses to avoid financial strain. Lenders will expect borrowers to have adequate disposable income or cash flow to be eligible for serviced payments.
Deducted (Retained) Interest
In deducted or retained interest loans, the interest for the loan term is calculated upfront and deducted from the initial loan amount provided to the borrower.
This approach is useful for borrowers who may not have a regular income stream during the term of the bridging loan, such as property developers awaiting sale or refinancing of a project. It eliminates the need for monthly interest payments, as the interest is already accounted for.
Since the interest is deducted at the beginning, the initial cash received by the borrower is less than the total loan amount. Borrowers should plan accordingly, as they will have less capital available upfront for their project or investment.
Both options have their specific uses depending on the borrower’s financial situation, cash flow, and strategy for the loan. It’s crucial for borrowers to understand these differences and choose the option that best aligns with their financial plan and the intended use of the refurbishment loan.
Yes, in fact a mortgage is not a suitable product for a property that is inhabitable.
A refurbishment lender will acknowledge the schedule of works planned to make the property habitable for letting, or sale.
Therefore, borrowers can take advantage of the lack of competition on these purchases as opposed to competing with home buyers.
You will not need an income to get a refurbishment loan, however, your lender will underwrite your exit and if it is set to be refinanced, they will sense check your income against suitable remortgage lenders.
Refurbishment loan lenders will usually want at least 15-25% of the property’s value because of the increased risks linked with these properties. In simple terms, they’re typically willing to lend you up to 85% of what the property is worth. Additionally, Refurbishment loan lenders may lend up to 100% towards the purchase price. So if your project is set to make good profit, you may need just 25% of the purchase price, plus the cost of stamp duty and upfront valuation finance and legal costs.
Just like mortgages, there are refurbishment loan lenders that allow for applicants with adverse credit. So whether you have missed payments, CCJs, defaults or even an IVA, we can still source you with a suitable refurbishment loans lender. If you have discharged from bankruptcy then your options will become better after 3 years and also subsequently 6 years.
Your refurbishment loan lender may enquire about your remortgage options for applicants with adverse credit.
Yes.
Often this can be a way around Loan to Value (LTV) restrictions imposed against applicants on buy to let mortgages, who are first time buyers.
Applicants using a refurb loan first, may need to remortgage, but they will then not be a first time buyer and the restrictions then lift.
Yes. Many of our clients use refurbishment loans to purchase properties from auction. It is good to instruct your broker immediately so you can establish which solicitor you may be dealing with. It is important to note that most short term lenders offering Refurbishment Loans will have a closed legal panel and therefore your chosen solicitor may not be able to act.
We assist our clients with refurbishment loans in England, Wales, Scotland and Northen Ireland.
Explore Our Latest News and In-Depth Blog Articles
At Mortgage Lane, we see the most complex of refurbishment loan applications, some of which make a good read for investors looking to learn from other applicants challenges, or for those effected by the topics! See more refurbishment loan topics covered in our blog here.
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