In this article, we’ll look at bridging loans for refurbishment and how they compare to standard loans. We’ll look at their benefits, their potential drawbacks, and what you need to do to get your application accepted. We’ll examine what kind of refurbishment bridging loans are available and the difference between a heavy and a light refurbishment.
In this article
- What is a refurbishment bridging loan?
- Light refurbishment vs heavy refurbishment
- Benefits of a bridging loan for property refurbishment
- How do bridging loans for refurbishment work?
- What is an exit strategy?
- Fees and interest rates
- Types of renovation bridging loan could help with
- The pros and cons of using a bridging loan for property refurbishment
- Our top tips for finding and securing a bridging loan
- FAQ
Picture the scene… You’ve found the perfect little ‘fixer-upper’ in the rolling Hampshire countryside that – if you play it smart – could represent a swift profit if you “flip” it. However, before you can do that, you need to refurbish it to a suitable standard. And that takes money – money you may have already used up on the purchase.
So what are your options?
Many property developers use a refurbishment bridging loan to pay for the renovation of a property before selling it. But what is a refurbishment (or renovation) bridging loan? And is it right for you?
Keep reading to see some of the most frequently asked questions answered by our experts. This will give you all the information you need to choose a suitable bridging loan.
What is a refurbishment bridging loan?
Refurbishment bridging loans are short-term financing secured against the value of your property. They are specifically for property investors and developers who want to convert or refurbish a property and then sell it quickly (known in the trade as ‘flipping’ a property).
Refurbishing a property could significantly increase its overall value, especially in highly desirable areas such as Bournemouth or Southampton. Bridging loans for refurbishments can include light renovations, complete ‘top-to-bottom’ projects, conversions, or turning a single property into a multiple-occupancy dwelling. They can also be used for multiple properties on one title (for example, converting several barns and a house on a former farm).
There are also refurbishment loans that are specifically designed for commercial premises and industrial developments.
There are two basic types of bridging refurbishment loan:
- First Charge – This is a loan that is the principal loan on the property
- Second Charge – This is technically a ‘bridging’ loan designed for borrowers who already have a mortgage secured against the property but need additional short-term funds to renovate or refurbish it.
Light vs heavy refurbishment – what types of renovation qualify for a bridging loan?
When you start researching refurbishment loans, you’ll hear two terms that can dictate the type of loan you apply for and its coverage.
- Light refurbishment—These are renovations that are primarily cosmetic and focus on aesthetic improvements to the property. They could include redecorating, fitting a new kitchen or bathroom, changing fixtures and fittings, or replacing windows and doors. Light refurbishments cost less than 15% of the property’s value.
- Heavy refurbishment—Heavy refurbishment loans are usually for more than 15% of the property value. These are more structural or significant, such as replacing a roof, adding an extension, or completely gutting a property and starting from scratch. The work could also require documentation such as planning permission, change of use, or listed building criteria, and it will also have to adhere to current building regulations.
Benefits of a bridging loan for property refurbishment
If you’ve already taken out financing to purchase a property or have spent your savings on buying that profitable cottage fixer-upper on the Isle of Wight, you may be wondering if you should stretch yourself further financially with a bridging loan. However, if time is a factor and you want to flip your property as quickly as possible to take advantage of a buoyant property market, a bridging loan may be the solution. They are relatively quick to apply for, and once approved, the money can be in your account in just a few days. That allows you to start work straight away on renovations.
Bridging loans also have more flexible repayment options compared to traditional finance options such as bank loans or mortgages. With interest rates of around 0.5%* for light refurbishment loans, they’re affordable too. However, it is worth remembering that interest repayments will be higher the longer the loan duration. So, if it’s a heavy refurbishment, expect to pay more in interest than you would on a light refurbishment.
Properties needing extensive renovation are often classified as ‘unmortgageable‘ by traditional lenders, making it challenging to get financing. If the building is uninhabitable, derelict, has a value less than £50,000, has serious structural issues (such as subsidence), or doesn’t have a kitchen or bathroom, the only financing you may be able to get will be a refurbishment bridging loan.
How do bridging loans for refurbishment work?
A renovation bridging loan is a short-term arrangement that is usually between three and 24 months in duration. However, unlike traditional loan agreements that may penalise you if you pay back the amount in full early, there are no early repayment penalties.
Initially, the lender will determine your eligibility, usually secured on assets. They will also examine your credit record, although this has less influence on the eventual outcome of an application than you might think.
Certain criteria must be met, including:
- The property must be valued by a certified surveyor
- Any mortgage repayments must be up-to-date with no arrears
- You must have equity in the property
- The property cannot be your primary residence
- You must provide costings and pricing for the renovations (this will determine whether it falls into the light or heavy renovation category)
- You must provide an exit strategy (see below)
If you are unsure about any of these – get in touch. Our expert advisors will help you check your eligibility before applying.
When applying for a refurbishment bridging loan, you will need to provide certain information, such as:
- Current bank statements and financial information
- Details of your assets and liabilities (this will decide whether the loan is a first or second bridging loan)
- Information on the property, including title deeds, planning permission (if applicable), etc
- Details of the planned work, including timescales and estimated costs
- The projected value of the completed project.
They may ask you about your property development experience and your portfolio if you are renovating multiple properties.
Most importantly, you will need to put together a realistic exit strategy.
What is an exit strategy?
This is the plan of how you intend to pay the loan back. Before your lender agrees to the loan, they need to know that you can repay the loan at the end of the term. This could be through selling the property or refinancing the loan through a mortgage. Without a firm exit strategy, it’s unlikely you’ll be approved for a refurbishment bridging loan.
Fees and interest rates
As with any financial arrangement, there will be additional costs, most notably fees and interest. The fees you may be asked to pay include:
- An arrangement fee – This is usually between 1.5-2% of the total loan
- An exit fee – Although not always applied, some lenders charge an exit fee, which could be a percentage of the loan amount or the development value.
- Valuation fees – As the lender will want an up-to-date valuation of the property, you will need to include valuation fees both before and after the refurbishment.
- Broker’s fees – If you use a broker to find a refurbishment bridging loan provider, they will charge a fee for the service.
- Legal fees – Don’t forget to include a certain amount for legal fees, especially if you need planning permission on a property to develop it.
Interest rates also need to be factored into your loan. For light refurbishments, the interest rate usually starts at around 0.4% and goes up to around 0.6%, depending on the amount and the agreed repayment period. For heavy refurbishments, the interest rate is slightly higher, at around 0.6-0.8%.
The LVT or Loan-to-Value (the value of the loan compared to the value of the asset) also needs to be considered. The larger the deposit or additional security, the lower the interest rate, which can significantly affect more extensive heavy refurbishments.
You can also choose how you pay the interest, either monthly or ‘rolled-up’ and paid in full at the end of the loan period. This can be a better option as it frees up your finances to spend on the development rather than covering monthly interest repayments.
Once all the criteria have been met, the loan is usually quickly approved and should be in your account within a few days.
Reasons to use a refurbishment bridging loan
With so many different financial offers on the table, why would you choose a renovation bridging loan? The key USP for these types of loans is the speed at which you can arrange one. A refurbishment bridging loan is an ideal choice for time-sensitive property projects such as auctions, renovating a property for a ‘quick flip’ or urgent renovation work to make a home habitable.
Types of refurbishment a renovation bridging loan could help with
Refurbishment bridging loans can be used for almost any kind of project, from a simple paint job to a complete renovation. This includes energy efficiency upgrades such as solar power or heat pump installation, major plumbing and drainage work, electrical and rewiring projects, installing new kitchens or bathrooms, or a barn conversion. For commercial customers, refurbishment bridging loans can be used for complete change-of-use renovations or industrial upgrading (such as installing mezzanine flooring or expanding an industrial unit).
The pros and cons of using a bridging loan for property refurbishment
Pros:
- A refurbishment loan can be arranged quickly for time-sensitive projects
- They’re flexible, providing finances for anything between three and 24 months
- There is often no financial penalty if you pay the loan back early
- They’re based on your assets, not your financial record
- Loan amounts range from £25,000 up to £25million.
Cons:
- Higher interest rates on longer loans for heavy refurbishment can be costly
- If your renovation costs increase unexpectedly, you may not have sufficient funds to repay the loan in full once the property is sold
- Some lenders will require you to have more than one property to secure a loan.
Our top tips for finding and securing a bridging loan for property refurbishment
- Get all your paperwork in order first. You’ll need to supply your lender with plenty of details regarding your finances, assets, property value, and so on. Make sure you have it all in place before applying for a loan.
- Decide which type of refurbishment bridging loan you need – The two main types of renovation bridging loans are for light or heavy refurbishments. Be sure to pick the correct type of loan, as this will also influence things such as the amount of interest you pay and the pay-back period.
- Shop around – Before you apply, do your research and shop around for the best deals.
- Sort out your surveys – Remember that you’ll need surveys both before and after the renovations are carried out, so get them arranged in plenty of time.
- Pay back early – If you can repay your loan early, you’ll save money on interest repayments. If you think you’ll be able to repay the loan before the due date, go for rolled-up interest to keep your costs down.
- Take into account your location—If you buy a renovation project in a high-value area such as Hampshire, the Isle of Wight, or Dorset, this may significantly impact the resale value of your property. So, you may be able to borrow more against an asset in a desirable location like Southampton, Poole, or Winchester.
FAQ
You can use a bridging loan calculator to determine how much you can borrow. The normal range is around 25-75% of the property’s value, depending on the renovation you plan to carry out.
For most refurbishment bridging loans, a poor credit history is not a barrier to application. The loan is based on your assets (the property you’re refurbishing plus any other property you may own).
You can apply for a standard loan, but you will be limited on how much you can borrow. You may find that interest rates for traditional loans or remortgaging are higher than for a bridging loan. However, longer-term loans for heavy refurbishment may be more expensive.
Some lenders will be happy to lend money on a buy-to-let property. You should talk to your lender for more information.
Get more out of your refurbishment bridging loan with Fresh Solutions
At Fresh Solutions, we like coming up with new and exciting ways to help you achieve your goals. Our Bridging Loans service is there for those time-sensitive operations, light and heavy refurbishments, and quick-sale renovations. Contact us today and talk to one of our team for impartial, no-nonsense advice on bridging loans and other financial services for customers in the south of England.
Call us now on 0333 577 3359.
