Sometimes cosmetic upgrades and minor improvements are all a property needs to add value. All too often, it seems like many buy to let lenders are reluctant to advance mortgages on properties which require even minor works of repair, modernisation or improvement.
If you’re not a cash buyer or if the property is deemed un-lettable, then financing the purchase with a light refurbishment loan might be your best option.
Property development
What is light refurbishment finance?
Mortgage lenders require that a property should be in good livable condition when purchased. This includes residential mortgages, buy to let mortgages and holiday let mortgages.
So if your intended purchase is a property that does not have a working kitchen or bathroom then mainstream mortgage lenders will reject it as being unmortgageable.
A light refurbishment mortgage is a type of bridging finance (short term loan) that is designed for situations where the property needs some non-structural work before it is fit to be lived in.
How does light refurbishment finance work?
A refurbishment loan provides short term finance, by way of a bridging loan, so that a property can be purchased and then refurbished. A typical loan term could be 6-12 months.
Typically the cost of the improvements should not exceed 15-30% of the property value.
The loans are set up as interest only and secured on the property as either a first charge or second charge.
Interest on the loan is charged monthly but interest payments can be rolled up and paid at the end.
Lending is based on the initial purchase price and then the gross development value (GDV). Funding of around 70-75% will be provided for the initial property purchase and then further funds released to cover the improvement works. The lender’s valuer will be asked to confirm the estimated post-works value of the property.
What is light refurbishment finance used for?
If you are looking to purchase or remortgage a property that needs repairs or refurbishment then this type of loan could be suitable.
If the work needed to the property is more extensive and also requires planning consent or building consent then a heavy refurbishment loan will be needed.
It can be arranged to cover these types of non-structural works:
- New kitchen
- New bathroom
- New flooring
- Plastering
- Painting and decoration
- New windows or door
- Plumbing and rewiring
- Damp proofing/insulation
Types of acceptable property
As the lenders are predominantly providers of bridging loans the type of property they will accept is very varied.
- Residential property
- Residential buy to let
- Residential buy to sell
- Holiday lets
- House in Multiple Occupation (HMO)
- Mixed use properties
- Semi-commercial
- Commercial property
Who can apply for light refurbishment finance?
These loans are a type of short term bridging and can be taken out by:
- Individuals
- Partnerships
- Companies
- SPVs
- Pension funds
- Trusts
As the permitted works are quite straightforward, the borrower does not need to have any previous experience of refurbishments so development finance for first time developers is available.
NO MINIMUM INCOME
INTEREST ONLY
FAST DECISIONS
INTEREST ROLL UP
How do you repay the loan?
Refurbishment loans are a type of short term bridging finance, so the lender will only offer a short term of 6-12 months. They will then expect the loan, and any accrued fees and interest, to be settled in full.
The lender will want to know your repayment exit strategy when you are applying for the loan. This is an important factor in lending decisions.
How you repay the loan will depend on your intentions for the property.
SELL
If you intend to sell the property, post improvement works, then this will be the method of repayment or exit strategy. You should allow enough time for the sale process before the loan is due to be repaid.
KEEP
If you wish to keep the property, either as an investment or to live in then you will need to find alternative long term finance. This means remortgaging the property to pay off the bridging lender.
The six month rule
You should be aware of the ‘6 month rule’ when remortgaging a property within 6 months of buying it. A lot of the mainstream lenders need you to have owned the property for 6-12 months before granting a remortgage.
If you are likely to be in this situation it is probably a good idea to go through your refurbishment project with one of our brokers prior to purchase. You will then get an idea on what is and is not possible.
Why use a broker?
At Drake Mortgages our team of brokers have specific expertise in development and refurbishment loans.
Property refurbishment can be financially rewarding but it does need the right type of financing. We know the lenders that are actively looking for refurbishment business. By working with us you will get an unparalleled level of loan choices, together with the help and advice of our whole team.