If you want to buy a property to let or redevelop and sell on rather than as your home, or you already own an investment property you want to make improvements to, a refurbishment loan can help. You can take one out whether you are refurbishing a residential or commercial building, either as an individual or company.
Compare bridging loans for refurbishments
Table: sorted by monthly interest rate
Overall representative example for regulated bridging loans
If you borrowed £195,000 over a 1-year term at 8.40% p.a. (fixed), you would make 12 monthly payments of £1,399.93 and pay £211,799.16 overall, which includes interest of £16,799.16, a broker fee of £995 and a lender fee of £3995.00. The overall cost for comparison is 11.6% APRC representative.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
What is a refurbishment loan?
A refurbishment loan is a type of bridging loan – short-term finance that you take out until you have the funds available to pay it back.
If you’re buying an investment property, you may not be able to let it for a high enough rent, or at all, without refurbishing the building first, or you may want to add value to it – by building an extension or converting a house into flats, for example – so you can sell it and make a profit.
You can’t usually get a buy-to-let mortgage if you need to renovate a property before letting it, and as a mortgage will be based on its current value and rental income, this might not let you borrow enough to do the work.
A refurbishment loan, which is secured on the property, is based on its value once the work is carried out. It helps you pay for the renovations needed to boost the value of your investment and you then pay it back once the work is complete, either by taking out a buy-to-let mortgage based on the new value and rental income or selling the property.
Bear in mind that you can’t usually take out a mortgage on a property less than six months after buying it, whether you bought it using cash or a mortgage. This is known as the six-month rule.
The term of the loan can be between one month and two years or more. You may be able to choose to have the interest “rolled up” into the loan so you pay if off with the capital at the end of the term rather than making monthly repayments.
As it’s a short-term loan, interest rates tend to be higher than for buy-to-let mortgages, starting at around 4% per year (0.33% per month). You may also have to pay a fee to the lender of 1% to 2% of the loan amount and valuation fees. Some lenders also charge exit fees at the end of the loan.
What can a refurbishment loan be used for?
There are broadly two types of refurbishment loans – light refurbishment loans and heavy refurbishment loans. Each one allows different types of work to be carried out. In general, light refurbishment involves cosmetic changes only, while heavy refurbishment involves carrying out more extensive work.
Light refurbishment loans:
- General redecoration, including painting, plumbing, electrics and flooring
- Replacing bathrooms and kitchens
- Upgrading windows and doors
- Repairs to the outside of the building
Heavy refurbishment loans:
- All light refurbishment works
- Structural changes such as knocking down walls
- Building extensions or adding extra rooms
- Converting the building so it can be used for something different, such as changing a commercial property to a residential one
- Anything that needs planning permission
How much can you borrow with a refurbishment loan?
Depending on the lender, you can borrow anything from £25,000 to £15 million, usually up to 75% of the property’s value (known as loan-to-value or LTV).
It’s a good idea to speak to a specialist bridging finance broker who can look at the whole available market and find the best option for your needs. They will be able to help you work out exactly how much you need to borrow and for how long and make sure your plan for paying off the loan at the end of the term is sound.
You may need to pay a broker fee for the service but they could save you money in the long run by getting you a better deal.
What are the eligibility criteria?
Different lenders will have different eligibility criteria but you can usually take out a refurbishment loan whether you are an individual, a sole trader, employed or self-employed. Some may only lend to borrowers in certain parts of the UK.
If you already own the property, you must be up to date with any mortgage payments and have equity in it. The lender will need to be satisfied with the valuation of the property and you’ll need to provide detailed plans and costings for the refurbishment.
You’ll also need to give details of your exit strategy – your plan for paying back the loan at the end of the term.
Lenders may want to know that you have previous experience in doing a refurbishment, especially if you’re taking out a heavy refurbishment loan, and which contractors are carrying out the work so they can be sure they will be able to do the work satisfactorily.
You will also have to provide evidence that you have the deposit money available as well as the funds to carry out the work as the loan is usually paid in two instalments – an initial amount to buy the property and then the balance once the renovations have been completed and the lender has reinspected and revalued it.
How soon can you receive the funds?
One advantage of refurbishment loans is that they can be arranged very quickly – in as little as one to two weeks, depending on the complexity of your application.
Pros and cons of refurbishment loans
Pros
- You can use them to borrow money to buy a property and refurbish it
- They are quick to arrange
- How much you can borrow is based on the value after the refurbishment
Cons
- Generally more expensive than buy-to-let mortgages
- You’ll need to provide detailed plans for your refurbishment
- If you can’t pay off the loan as planned it’s costly to extend the term
What are commercial refurbishment loans?
A commercial refurbishment loan is exactly what it says on the tin. Offering a tailored financial solution for businesses looking to renovate or refurbish their commercial properties, these loans are typically used by property developers, landlords and investors. These mortgages provide the necessary funding to undertake significant upgrades or improvements, whether it involves a complete overhaul or structural enhancements.
A commercial refurbishment loan usually comes in 2 forms. A first-charge or second-charge mortgage (also called a bridging loan). A first-charge commercial mortgage takes precedence as the primary loan secured against a property. While a second-charge mortgage could allow businesses to access additional funding while maintaining the existing primary loan structure.
Lenders typically assess the project’s feasibility and the borrower’s ability to repay, ensuring a structured approach to financing commercial property improvements. By utilising a commercial refurbishment mortgage, businesses can revamp their properties, potentially increasing their value and competitiveness in the market.
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