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Dear Delia…

Dear Delia, My clients have found a property that they want to purchase as a buy-to-let investment. The problem is that it requires extensive refurbishment and is not suitable for immediate occupancy. Also, the vendor wants to complete as soon as possible – in three weeks at the latest. How can they buy the property in a way that minimises the deposit required and complete the deal in the timescale involved?

Delia says: Bridging finance may be the solution as Sue Cox of Bananas Inc and Mark Posniak of Cheval point out. Have you got a problem for Delia? Email mortgage.strategy@ centaur.co.uk


Intermediary response
Sue Cox is business manager at Banana Inc
The key to this deal is the extent of the refurbishment required. A few buy-to-let mortgages allow for limited refurbishment work, which means internal work but nothing more.

Such products could be useful as they allow borrowers to obtain larger mortgage advances. They usually provide borrowers with offers based on property valuations after refurbishment is completed.

For example, someone buying a flat for £150,000 and spending £20,000 on refurbishment might have a flat with an estimated value of £190,000 by the end of the process. As a result they could get an advance based on £190,000 rather than £150,000.

On completion of the property purchase, cash based on the present-state valuation is advanced to the client. Once refurbishment is complete, the rest of the cash is immediately released.

But if the work required is more than an internal make-over, a bridging loan might be a better bet. Lenders would take the property as security and advance your clients the necessary funds for the purchase.

I presume they are aware that in the prevailing market conditions they should be able to extract favourable terms from a vendor who wants to complete within three weeks. They should be looking at a double digit discount off the market price for such a speedy purchase.

If they can negotiate a large discount, a bridging loan might be a better bet than a traditional mortgage as bridging lenders will lend on value rather than purchase prices.

For example, if they buy the property at a discounted price of £200,000 but it’s worth £230,000, a bridging lender will lend them a proportion of the latter figure. This will reduce the amount your clients need to find as a deposit, freeing up cash for refurbishment.

But a word of caution. If they decide on bridging finance, you should advise them to consider lenders that charge daily interest in the month the mortgage is redeemed.

There are a few that will still round up interest charges for the whole month, although borrowers are allowed to redeem the loan on the second day of the month.

And bridging lenders with a customer code of conduct are also recommended. After all, unlike traditional lenders that are regulated by the Financial Services Authority, bridging lenders are not.

As a result, the principles of the FSA’s Treating Customers Fairly initiative are not employed by all lenders in this sector.


Lender response
Mark Posniak is director of sales and marketing at Cheval
The use of the word extensive in the question indicates that a considerable amount of work is needed on the property.

This would leave it outside the scope of many refurbishment buy-to-let products offered by mainstream lenders as they usually specify light refurbishment only.

But bridging lenders would be in a position to lend the money to purchase the property swiftly. Unlike traditional providers they are able to lend on the value of the property rather than its purchase price, which in this case may be reduced given that the vendor wants to complete as soon as possible.

In this instance, we would be prepared to lend up to 65% LTV and charge from 1.15% per month.

As we all know, bridging loans are designed to provide finance quickly but only for the short term. It can become expensive if used over a longer period of time, so borrowers must have a plan in place to redeem the bridging loan sooner rather than later.

I would advise your clients to complete the refurbishment as quickly as they can. Paying for a qualified professional to draw up a development plan with a strict timetable of works will save them money in the long run.

It might also be worth employing the part-time services of a project manager to ensure all goes to plan as long overruns with the refurbishment work will cost them dearly.

By working to a definite completion date, costs will be kept to a minimum. Once the work is completed, the clients can arrange a remortgage with a high street lender to redeem the bridging loan.

But before applying for any loan they need to seek the advice of at least two builders to get an idea of the extent and cost of the work required. They don’t want to bite off more than they can chew.

They also need to have an accurate idea of what the property will be worth when it is renovated and should get the input of three estate agents in the area before proceeding.

It doesn’t makes sense to work on a property that will be worth less than the purchase price and renovation costs combined. This is particularly true in the prevailing market conditions, with property values stalling or even falling in some places.

As with most things in life, the project has a greater chance of success if sufficient time and effort is invested in the groundwork.

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