Dear Delia…

My client is looking to buy a house in need of renovation for £250,000. He wants the deal to be done as quickly as possible to secure the best terms from the seller and intends to refurbish it. If improved, he knows it will be worth considerably more than it is now. He anticipates a selling price of £330,000 for the improved property. What deals should he consider for buying and then improving the property?

Delia says: A refurbishment mortgage may be the answer. Sue Cox of Bananas Inc and Mark Posniak of Cheval look at the options.

Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk


Intermediary response

Sue Cox is business manager at Bananas Inc

You do not state whether your client is an existing home owner or not. If we presume that he is in the fortunate position of having plenty of equity in his home, he could raise capital by remortgaging. He would have to have at least £300,000 of equity but this is realistic if he has owned a substantial home for many years.

This would probably be the least expensive way to raise the cash he needs. If he wants to keep his payments down for a while, he could take the loan on an interest-only basis or increase the term of his mortgage.

If he’s looking to sell the house after he has refurbished it, he should look to pump the money back into his mortgage as soon as possible.

You should make it clear that he would be raising money against his own home to invest in something which carries a risk and may not be worth what he thinks.

This sort of exercise is more of a gamble now than it was six months ago. Then, rising property prices provided a se-cure background for such transactions but today prices are falling and there’s a chance of making a loss on renovations, especially if they turn out to be costlier than imagined or more time-consuming.

It’s not clear whether your client is looking to sell the property at a profit once the work is completed or retain it as an investment to rent out. If the latter, a refurbishment mortgage would allow him to borrow up to a specified LTV of the unimproved value of the property and once refurbishment work has been completed, get further finance on a proportion of the value of the refurbished property.

No rental cover is needed for the initial loan but cover on the interest payment is required on the post-refurbishment mortgage.

For example, a lender may initially lend 80% of the property’s unimproved value – in this case 80% of £250,000 – with no rental cover required and once the work is complete, 80% of its refurbished value – 80% of an estimated £330,000. The difference in the value of the advances is held as a retention. A valuer then revalues the property and confirms the refurbishment is complete and the retention is released.

Buying at short notice could mean that the timescale for a conventional refurbishment mortgage is impractical. If this is the case, bridging finance may be a solution.


Lender response

Mark Posniak is director of sales and marketing at Cheval

It never hurts to state the obvious, especially if a client does not have any experience when it comes to this sort of property development. You should point out that attention to detail and careful planning will be vital.

First, he must ensure his post-improvement valuation is accurate. He should do this by getting the advice of at least three estate agents familiar with the area in which he is looking to invest.

After this he must make a comprehensive plan for the re-novation work. He should obtain several quotes from builders and get an idea of the timescales that will be in-volved in completing the job.

Better still, he should try to get a builder to sign a contract that ties them to completing the work within a certain timeframe and a certain budget.

Most builders will have a problem with such a binding arrangement but he could try as some may be willing to work on a performance-related basis.

Time is money in investment projects where clients are looking to sell properties once they have been renovated. The longer it takes for the work to be done, the more the finance will cost and the lower the profit will be.

A handful of products are targeted at this area of the market but not all deliver finance in a short timeframe.

We have recently introduced a light refurbishment product aimed at experienced property professionals with a record of successful refurbishment projects. This deal offers a fast application-to-completion turnaround. We will advance the lower of 70% of the market value or 80% of the purchase price of the unimproved property, as well as 100% of the cost of the refurbishment work.

The product is designed for light refurbishments so if your client’s house needs more extensive work it will not be appropriate. We allow most building work with the exception of structural alterations requiring planning permission or building approval.

This is probably a good thing from your client’s perspective because it limits his exposure to the risk of the renovation being more extensive than envisaged. When improving a seriously dilapidated building there’s always a risk of encountering unexpected problems.

We charge a rate of 1.5% per month for our light refurbishment loan, we will only lend on residential properties and refurbishment costs can be no more than 10% of the purchase price.

An administration fee of 0.5% is payable and as with all our loans, we require a statement of the borrower’s assets and liabilities.