Higher LTV’s and great for some people. But don’t overlook the alternatives
When you are involved in property development, it’s common to buy a house that needs attention and that’s where refurbishment bridging often springs to mind. Usually, the property will only need some light refurbishment and it is in a condition to let occupied or rented out. However, you may come across a really promising property that could need heavy refurbishments.
You can get bridging finance for refurbishments to help cover the costs of the renovation. Then, you pay back the loan during or at the end of the term. It’s always best to try and get the loan paid off during the term. This way, you won’t have to pay the interest on the remaining months on the term.
If you are in a position to pay back the remainder of your bridging loan in full, preparing in advance could save you a lot of money. A solid exit strategy that details your plans clearly, keeping on schedule with renovations and a quick sale, or remortgage, of your property once refurbished can help you pay back your bridging loan early. As a result, you will save on the interest that you would’ve had to pay on the remaining months of the term. Just make sure when you apply for your finance, you check to see that there are no exit fees involved
Whatever work needs to be done to the property will correlate to which type of refurbishment bridging you apply for.
Light refurbishment bridging
Light refurbishment is where you have plans to renovate the property without the need for planning permission. This may involve a new kitchen, new bathroom or redecoration. Most houses you see on the market may require light refurbishment, especially in older builds with outdated decor and facilities. Property developers will normally carry out any light refurbishment before the sale or rentals of the property. At the time of writing bridging loans are available to to 85% of the purchase price including 10% to be used for light refurbishment.
Heavy refurbishment bridging
Any heavy refurbishment on a property needs planning permission or building regulations before work can begin. You may need to perform heavy refurbishment if the property has structural damage that needs repairing. Also, if the developer has plans to dig a basement or convert the loft into living space, you will need planning permission. Heavy refurbishment finance will also be required in most cases if you plan on converting a commercial property into a residential home or flats.
Instances where you might need planning permission include, but are not limited to:
- Structural alterations or additions to builds including
- Building an annex in your garden
- Flat conversions
- Changes to part or all of the property to a non-residential building
- Work outside the boundaries of the property
- Demolition of buildings and rebuilding
- Any work on a block of flats
- Creating a separate dwelling
Class for Use
When refurbishing a property, it is always good to know what class your building is. Plus, you also need to be aware of changes you make that could alter the class the building resides in. As time moves on, businesses are becoming more digital. As a result, more commercial properties are ending up for sale.
People are starting to invest in commercial buildings with the intention to turn them into residential properties. There are development products designed specifically for this purpose. Because they look at the final value of the property that can help raise more. This helps you put in the minimum amount of your own cash. When carrying out extensive work on a building or property, make sure you know what class the building is in. Local authorities use these classifications:
- Firstly, there is Class B which covers general distribution, storage and industrial buildings.
- Secondly, there is Class C which includes residential households, care homes and hotels.
- Then you have Class E which covers Commercial buildings such as offices, nurseries and shops.
- Finally, you have Class F which includes community and learning centres like museums, libraries and meeting halls.
Other costs involved
Interest rates on the loan vary depending on the type of refurbishment you have to do. Light refurbishment interest rates start at a lower rate. On the other hand, heavy refurbishments command higher interest rates. The size of your deposit, or the loan-to-value (LTV), also has a big effect on interest rates. Having a large deposit, you could save a lot of money on interest payments.
There are also other fees that can factor into your finance depending on what the lenders specific criteria are. You could encounter these specific fees with bridging finance.
The lender will usually charge a fee for setting up and processing your application. For bridging finance, the norm is anywhere around the 1-2% mark.
Brokers can charge a fee for the arrangement of refurbishment bridging loans. however they get paid by the lender so on a larger loan amount, ask if they can waive their fee.
Because they are charged early in the process, valuation fees are calculated separately to the other fees that are added to the finance. Refurbishment bridging valuation fees are usually slightly higher than the same fees on a buy to let or residential mortgage.
Both yourself and your lender will have legal help in the process of going through your loan arrangements. You would be expected to pay your own legal fees as well as the lenders
An alternative approach to bridging
Bridging and development finance can be expensive. Consider other options such as a regular mortgage or secured loan secured against other investment property you own – or your main residence. Secured overdrafts can work well for property investors. Unlike bridging loans they can be used, repaid and used again many times without additional set up fees.
Talk to a specialist who can assess your entire circumstances and suggest alternatives to bridging – or do your own research.
In conclusion, you must consider what type of refurbishment is required for your job. In addition, make sure you get in touch with someone experienced, preferably whole of market as well. Finally, If you have any questions or queries, get in touch with one of our experts here at Promise Money.
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