Renovations, refurbishments and conversions: Finance Options
In this article we will look at the finance options available for property refurbishments, restorations and conversions of commercial, semi commercial buy to let (BTL) and Holiday Let property and specifically not for buying property for use as a primary residence which either requires upgrading immediately, or is just for the upgrading of a property already owned as an existing primary residence.
Over the last 5 years, the UK Government has succeeded in cooling the buy to let investment market through 4 measures. These measures have been particularly successful in the South and South East, but not quite so effective in The North.
So, property investors are looking at alternative strategies and one of them is refurbishments. Refurbishing tired or dilapidated properties can add value and improve saleability very cost effectively. Similarly, converting properties from one use class to another; not only does the change of use add value, but there is then the extra value created by the work done.
- refurbishing derelict or semi-derelict or otherwise uninhabitable property
- barn conversion i.e. agricultural use to residential use
- offices to flats
- farm stables to holiday cottages
- other quirky buildings e.g. an old chapel to a pair of holiday flats, a disused railway station to a holiday complex
- disused light-houses, windmills, WW2 bunkers to restaurants
Such projects allow investors/developers to add significant value, provided of course their judgement is correct. A fundamental component of success, rather than costly failure, is finding the right loan and, especially, checking at outset exactly how that loan will be paid off. It requires the knowledge and experience of a good finance broker who knows how to navigate the specialist market that is refurbishment finance.
Types of Refurbishment Finance
“Refurbishment” buy to let products
This term can be misleading. The lender’s intention with this terminology is to facilitate a purchase for a property that needs minor works in order to be able to let. It is not a property development loan or a loan for major works. Moreover, when the loan requested represents a high LTV, the lender will only lend against current value not future value after works. In this circumstance work must be funded by the borrower before the lender advances the money. Decorating, installing a new boiler, renewing bathroom or kitchen, would generally be acceptable. Work requiring planning permission (or work under permitted development) or requiring Building Control sign-off would not qualify for these mortgages.
Whether an investor wants to retain the property or just to “flip it”, is more to do with the choice of product rather than what you do with the property.
It is important to give the broker as much information as possible, both about existing condition and intended work. It will save time in pointless mortgage applications and money in abortive fees.
Development and Refurbishment Bridging Loans
Refurbishments and renovations that require a fair degree of work, will generally require a refurbishment bridging loan. Whereas the lenders in this market do lend on full blown development projects from scratch, they offer cheaper interest rates where the works required can be classified as refurbishments or renovations.
There are 2 distinct types:
Light Refurbishment Bridging
This would attract lower interest rates and be suitable for properties needing:
- kitchen and or bathroom refits
- new windows
- new heating system installation
- internal redecoration
- full rewire
- non-structural refurbishment or improvement
Heavy Refurbishment Bridging
This would attract the same or similar interest rates to full scale property development interest rates and would be suitable for properties needing:
- planning permission (or permitted development work)
- full plans building regulation application
- barn conversions
Whereas it is unlikely that Light Refurbishment requires the services of other professionals, such as architects or project managers, for Heavy Refurbishment, it is very likely, and the cost of those services needs to be included in the project evaluation and loan request.
The lending market is diverse enough such that you will certainly benefit from consulting an experienced broker about refurbishment finance.