Should you refurbish to let?
It can be a dilemma for a landlord when they wish to buy a property but a certain amount of work needs to be done to bring it up to a lettable standard. This is when you need to refurbish to let your property.
Consequently, a mortgage valuation at purchase is unlikely to confirm the property is lettable and therefore a standard buy to let mortgage won’t be available. However, there are a number of products on the market that can help.
Why not use bridging?
Historically, landlords may have considered a traditional bridging loan. And whilst there are some excellent products available for refurbishment, there is always the question of being able to afford the bridging finance without any rental income. This therefore can lead landlords down the path of taking a bridging loan with the interest payments being retained. This in turn reduces the amount they can borrow in hand as a retained interest eats into the LTV.
Here a simple example based on a £100,000 valuation and a 75% bridging loan. But please don’t rely on the numbers – this is to demonstrate the principles.
£100,000 valuation x 75% = gross borrowing £75,000.
Assume all interest is being retained for 12 months at a rate of 0.6 % per month.
£75,000 x 0.6% per month x 12 months = £5400.
£75,000 less interest of £5,400 reduces the amount in hand. Therefore, this leaves £69,600, from which any fees and legal costs may also need to be deducted.
It important to note that if the bridging loan is repaid before 12 months, the amount of whole months where the retained interest wasn’t charged is returned to the borrower. But, that doesn’t help if you are trying to raise the maximum amount at day 1.
Let’s examine a few products which may help.
85% LTV refurbishment bridging
This product is aimed at experienced landlords who have also previously purchased, refurbished and rented out property.
The beauty of this product is that the lending is up to 85% loan to value. This creates more room to cover the costs of refurbishment as well as any interest which is added to the loan. 100% of the loan proceeds are released to the borrower on day one. This avoids the need for stage drawdowns and their associated costs. However, you have to bare in mind fees and interest.
The product is only available for refurbishment works which can be completed relatively quickly. It also doesn’t involve any structural work which requires planning consent or change of use. So, it’s ideal for new kitchens, bathrooms and upgrading fixtures fittings. It can also be used to meet the requirements of the latest energy performance certificates or electrical safety standards.
A landlord could borrow up to 85% of the property value in its current condition provided the borrowing doesn’t exceed 75% of the completed value.
Refurbish to let mortgages
These specialist mortgages are effectively a bridging loan followed by a mortgage but are offered by the same lender.
The advantage of such products are that both a bridging loan and the mortgage are agreed upon at the outset which gives landlords greater certainty. In addition there can be a cost-saving as the lender will normally only require one valuation and there is one set of application fees rather than two.
However, there are a few drawbacks. Just like the 85% refurbishment bridge above, the products are restricted to light refurbishment. Also, the LTVs are not as aggressive so the bridging element is likely to be limited to 65% loan to value. The subsequent mortgage (at the time of writing) is available up to 75% loan to value.
Another consideration is that overall the pricing of both the bridge and the mortgage may not be as favourable as if you split each element into separate transactions and negotiated them separately with different lenders.
Secured loans on other property
There is an array of secured loan (second charge) loans available. These can be secured on the borrower’s main residence or on one or a number of BTL products.
Second charge loans are often overlooked as a means of creating cash to fund deposits or refurbishments. But, recently products have been introduced which act like an overdraft. This means landlords can dip in and out of the drawdown cash and repay it without penalty
There are no clear rules on which approach will work best for a particular borrower.
However, it’s fair to say that the 85% bridging will get more money raised at day one which may be an important consideration. The bridge term product may save a little in upfront costs and seem convenient but may restrict the amount of borrowing and the terms available on the exit remortgage.
Speaking to an expert who has access to the best bridging products, the best bridge to term products and standalone buy to let mortgages should be able to work out which route works best for you.
Talk to a Promise Money adviser for more details
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