Whether you’re an established property developer with a large portfolio or a first-time investor undertaking their first property renovation, refurbishment loans can be an extremely useful source of short-term finance to help you get your properties to market.
Our refurbishment finance expert Sunny Panwar has more than 20 years’ experience in commercial finance as a broker, a lender and as a client, with her own property portfolio.
What is Refurbishment Finance?
Refurbishment finance, sometimes known as a refurbishment mortgage, refurbishment loan, or renovation mortgage describes a type of short-term loan that is available to enable you to carry out light or heavy refurbishment works on a purchased investment property.
The type of refurbishment finance you need will depend on the type of proposed works to be carried out.
What’s the difference then between Development Finance, Bridging Finance, and Refurbishment Finance?
All three are types of short term loans that enable developers and investors to fund difference stages of a property project. All can be used towards development projects such as construction, refurbishment, conversion and renovation, but a simple way to describe the differences is this:
Development Finance is for starting a property project -including both residential and commercial property-from the ground up. If you have the necessary planning permissions in place, it can be used to buy land, or cover 100% of build costs including infrastructure and property along with associated professional fees.
Bridging Finance is used to fund the gap between purchasing or refinancing an existing property while you add value or release funds for other purposes. They are particularly useful for financing auction purchases, properties bought for rental purposes before the tenants and leases are in place and acquiring land for development purposes.
Refurbishment Finance provides funds to complete necessary – or cosmetic- work on existing properties in order to add value to them.
It is relatively common, for example to use bridging finance to purchase a property at auction, if the property requires any work then use a refurbishment bridge to undertake heavy and light refurbishment works and then refinance the entire project with a mortgage or sell the property.
What can refurbishment finance loans be used for?
Refurbishment finance is designed to support small development projects. Typical work that can be funded by refurbishment finance includes:
- Refurbishment costs on commercial or residential property
- Minor cosmetic alterations such as redecoration, a new bathroom or kitchen
- EPC improvements
- Plumbing and drainage work
- Rewiring and electrical work
- Major structural changes, extensions, and change-of-use conversions, i.e. from commercial to residential (typically requiring planning permission)
What’s the difference between light refurbishment and heavy refurbishment finance?
Depending on the work you plan to do, you can approach a lender for either a light or heavy refurbishment loan. They come with different rates and application criteria so it is important that you are transparent on the needs of your project.
Light refurbishment loan
Generally speaking light refurbishment loans fund work that doesn’t need planning permission or building regulation checks. The intended use of the building remains unchanged, and you don’t need to have any previous experience in property development or renovation.
It can fund anything from painting and decorating existing walls and structure, even putting in a kitchen into an existing space.
Heavy refurbishment loan
Heavy refurbishment loans are available for properties when planning and building regulations are required. This includes structural works like an extension or a change of use, such as converting a 5-bedroom residential house into a 9-bedroom multi-occupancy home.
Unlike Development Finance, Heavy refurbishment finance covers work on existing buildings. You may want to change the structure; add or remove walls, repair roofs for example but the building already exists. It isn’t for ground up developments.
How does heavy refurbishment finance work?
At the Commercial Branch, we work with lenders that specialise in Refurbishment Finance. First you will be asked to specify what type of work needs doing to determine whether you need either light or heavy refurbishment finance.
Then the lenders will send out a Valuer to inspect the property, assess with the schedule and type of work, the projected time schedules and costs, and that once completed the work will add sufficient value or complete the property to a sufficient state to enable you to repay the loan.
They will also want to check the scope of work, and the contractors you have in place working on the project.
Much like Development Finance, the loan can be released in stages to fund each part of the refurbishment project but also minimise the borrowed funds -and interest accrued.
The lender will normally also appoint a Project Monitoring Surveyor who would inspect the work at each stage and report back on the progress of the refurbishment before the next tranche of funding is released.
How much can you borrow using a refurbishment loan?
Depending on whether you are seeking light or heavy refurbishment finance, each lender will have different funding criteria, interest rates and LTV amounts.
The refurbishment finance lenders we work with will consider loans from £25,000 up to £25m.
Typically for light refurbishment finance you can borrow up to 100% of the cost of the work.
For heavy refurbishment, you can borrow up to 75% of the property value, and sometimes up to 100% if you are able to offer additional security.
Can first-time investors or developers get a refurbishment loan?
Yes. It is possible for first time investors to take out refurbishment finance, but this will be dependent on a number of things.
The lender will want to know that the planned refurbishment work will add sufficient value to the property to repay the loan and that you have a suitable exit strategy in place via a sale or by refinancing through a mortgage.
Also, if you have no track record of property refurbishment, the lenders will want to assess the team of contractors you have in place doing the actual work.
Can I live in the property once it has been refurbished?
It is very unusual for a lender to provide refurbishment finance on a property the borrower intends to live in unless you have taken out a regulated bridging loan.
Typically, once completed these types of project are refinanced by a Buy-to-Let mortgage as the property is let to tenants.
How do you repay a refurbishment finance loan?
When the refurbishment project has completed, the borrower will typically need to repay the loan. Repayment of the loan is usually from a sale or refinance of the project. During the life of the project, any interest owed is usually rolled up monthly and added to the loan, which is then repaid at the end of the loan.
Why use a Commercial Finance broker?
As a property investor, you could approach a refurbishment finance lender yourself but by using a specialist broker like the Commercial Branch, our team has expert knowledge of whole of the short-term lending market, meaning we can identify the lenders that are best places to meet the needs of a wide variety of property investors and landlords.
From start to finish, one of our brokers will guide you through the process, be readily available to answer any questions and relieve your stress and hassle.
From being presented with one option, we can assess the whole market to provide options best suited to your needs.