The purposes for property refurbishment are extensive and bridging can be the flexible friend that enables it to happen
Refurbishment is a key area of demand for bridging loans. Increasing numbers of people recognise the money to be made from the refurbishment of a property – and the value a short-term bridging loan can add, providing funds for the work ahead of a sale or a refinancing onto a longer-term loan.
Refurbishment can range from a new kitchen to a complete overhaul of a property. Increasingly, there is a need for funds for a change of use.
Since the change in planning legislation a couple of years ago, more developers are changing former offices into residential accommodation, while the trend to refurbish for buy-to-let continues, despite the stamp duty increases. Sometimes this is just sprucing up a property to enable it to be let; other times it is transforming it into an HMO to let to multiple people.
The purposes for refurbishment are extensive and bridging can be the flexible friend that enables it to happen.
From a broker’s point of view, the person carrying out a refurbishment for BTL is the ideal customer because it can mean multiple repeat business.
First the short-term loan needs to be arranged to provide the funds for the refurbishment. In a second bite at the cherry, many developers usually convert that into a long-term loan once the work is complete. Regardless of whether they do that or sell the property, they may go on to develop other properties and so are likely to need the service of a broker for further loans or mortgages. The broker who understands bridging and does a great job on the first bridging loan could find the client turns into a very good long-term prospect.
It may seem obvious why a bridging lender would also want to lend to such a client. As long as the borrower knows what they are doing and is putting their own funds into the redevelopment, refurbishment presents a good risk. In some cases a lender will lend at higher LTVs, knowing that the LTV will reduce during the refurbishment as the property’s capital value increases. It is therefore always worth a broker’s while to speak to the lender directly and not take the published LTV as read.
A lender is more likely to stretch the LTV if it has worked with the broker previously or with the borrower on a successful project. It can be confident that either or both know what they are doing.
This is important because the risk for the lender comes if the borrower does not complete all the required works before the end of the term; or if they run out of funds, either because the refurbishment has taken longer than expected or because they have found problems they didn’t expect. These can be mitigated but it is important for the lender to do its due diligence on both the borrower and the project. A good broker who knows their client and what they do plays a valuable part.
At Hope Capital, we always look for borrowers with a proven record on property refurbishment. We ensure they have undertaken a number of projects in that area and have a team behind them who know what they are doing.
A good lender will then monitor how the agreed works are progressing at every stage of the development; it will also build milestones into the loan agreement to keep the borrower to a timescale for completion.
Of course, there are occasions where unexpected issues are found. If the lender has kept on top of the project and recognises it is a good risk, it will often be possible to provide extra funds to overcome these issues, but this will depend on the LTV that the lender is comfortable with and whether there is any value left in the security property.
For example, we were recently able to facilitate a loan at 82 per cent LTV for a broker and borrower we had worked with before. The borrower wanted to undertake a refurbishment of a residential property. Because they were known from previously successful loan projects, we were comfortable the improvements would bring down the LTV to 59 per cent at the end of the loan term.
This enabled the borrower to take advantage of an opportunity to increase the value of their property substantially, resulting in an offer for £225,000 above the initial purchase price.
Jonathan Sealey is chief executive of Hope Capital