For the past three years, the reason for almost 50% of all UK bridging finance was for property refurbishment. But before you apply for refurbishment finance, learn more about the advantages and disadvantages, who they’re for and what you’ll need to apply.
Bridging loans for property refurbishments
Refurbishment bridging loans are a type of short-term commercial financing typically utilised by investors, landlords, and property developers to renovate a property prior to renting or selling it.
In many cases, the goal is to increase the property’s open market value before selling it. You can utilise the bridging loan for renovation work to achieve this, including extensions, conversions, and renovations, as outlined below.
Bridging loans for renovations
Typically there are two types of renovation loans: first charge and second charge. The loan is a first charge if it is the property’s principal loan. A first charge is also referred to as the senior charge. A second charge renovation (or bridging) loan is intended for borrowers who already have a loan or mortgage secured against the property as a first charge but require additional financing in the short-term to take the project forward.
Choosing between a residential and a commercial renovation loan
A refurbishment loan can be used to renovate residential, commercial premises or semi-commercial. Examples include buy-to-let dwellings, holiday homes, investment properties, hotels, bars, cafes, offices, leisure centres, golf clubs, yacht clubs, petrol stations, and retail. Whilst not an exhaustive list it illustrates how versatile the applications can be.
If you want to renovate a residential or commercial building, it could be the ideal solution you’ve been looking for.
One of the most common types of property development financing is a bridging loan. Refurbishment bridging loans are frequently utilised for refurb projects or small renovations on residential and commercial properties.
Is there a difference between a bridging loan and property development financing?
Simply put, a bridging loan is a short-term loan that lasts no more than 12 or 24 months. It is paid out as a single lump sum loan with no monthly payments and is returned in full in a single lump amount at the end of the period.
The main distinction between this and property development finance (sometimes known as a development loan or simply just development finance) is that it is not drawn in one lump sum but rather in stages as the development schedule dictates.
Because new-build construction takes longer than simple refurbishments or restorations, this method of drawing down in stages reduces the amount of interest paid on the loan because only the necessary funds are pulled as and when they are required. It works well for bigger property development projects, but it can be overly complex for smaller ones such as refurbishments or renovations. A bridge loan is more likely suited to property refurbishments, renovations or smaller conversion projects.
What are the fees of obtaining a refurbishment bridging loan?
A bridge loan’s usual charges may include any or all of the following:
Rates of interest
Short-term loans, such as bridge loans, have higher interest rates than typical mortgages offered by established institutions. Interest is usually computed monthly rather than annually, and typical interest rates vary from 0.5% to 2% per month, while they may be lower for much greater loan values or low LTV or LTGDV.
Brokerage commission
Broker fees cover our time spent analysing your situation, presenting it to our expert lenders, aiding with the loan application, assessing the bridging loans or development finance choices for you, and finding the best solution for you. A broker charge is typically 2% of the overall loan amount.
Fee for arranging (also known as facility fee)
This is a fee paid to the lender for arranging the loan; it is normally 2% of the total amount borrowed, although it varies per provider.
Fee for valuation
The charge paid to the appraiser who will come to the property to determine its worth, also known as its open market value.
Fee for administration
This is used to cover the cost of loan administration from application to conclusion, which is usually less than £500.
Fee for redemption
This fee is just for tasks like eliminating a charge on an asset, which can cost up to £200 depending on the lender.
Solicitor fee
Lenders employ solicitors to arrange and secure a charge on a property for obvious reasons. The borrower is always charged this cost for drafting legally binding contracts and other documents.
What types of renovations are typically undertaken with a property renovation loan?
The lender will specify the types of renovations you are allowed to do with a refurbishment loan. Each lender differs, just like every other sort of business financing, and each has their own set of rules and criteria.
Here are a few common examples of works financed by refurbishment loans:
- Buy-to-let refurbishment
- HMO conversion
- Office to dwelling conversions
- Residential and commercial renovation projects in general
- Loft or conservatory additions are examples of property extensions.
- Converting a house into apartments
- Residential-to-commercial conversion
What is the difference between a light and a heavy refurbishment?
Fixtures and fittings, interiors, and flooring are all examples of light refurbishments. Structural work, moving walls, extensions, loft or basement conversions are frequently classified as heavier refurbishments. Both light and heavy renovations are eligible for these types of loan.
Final thoughts…
Bridging finance for property refurbishment is a versatile financing tool ideal for light or heavy refurbishments and renovation projects for investors, landlords and developers who are aiming to increase the property’s open market value before selling and realising the profit or receiving an income via rental. You can utilise the bridging loan for anything, including extensions, conversions and renovations.
