If you are looking to spruce up a property before renting it out, it might be that you don’t need to undergo a whole property development project. With refurbishment finance, you can take out a loan to simply upgrade a tired property, without resorting to extensive building works.
Within a refurbishment loan, funds are typically released in two portions. The initial payment is calculated based on a percentage of the purchase price and is paid upfront, with the rest of the balance being released once the work has been completed and an inspection has been carried out. How much you can borrow depends on the projected value of the property post-refurbishment and the anticipated amount of rental income that will be achieved once the property has been modernised.
It might be that the lender agrees to loan funds equivalent to 70% of the property’s end value, with the investor initially receiving funds equivalent only to 70% of the purchase price. Only once works are finished will the investor receive the remaining funds, which can be used to settle any outstanding payments.
When applying for finance, refurbishment is generally split into two categories:
Where no planning permission or building regulations are required and there is no significant change to the use of the property, the project falls into the category of light refurbishment. When undertaking a light refurbishment project, you’ll be investing in small-scale work, which might include having a new kitchen or bathroom installed, having new windows put in or simply redecorating.
Where planning permission or building regulations are required in order for work to be undertaken, it is categorised as a heavy refurbishment project.
Rates tend to start at around 5.5%, with finance for standard buy to let houses and flats being available at up to 75% of the end value. More complex refurbishment projects, such as those concerning whole blocks of flats, are financed at higher rates.
Rates vary depending on the scale and complexity of the project in question, but if you are planning to keep the property as a buy to let you could expect rates starting from the 5.5% mark. Heavy refurbishment projects will have slightly higher rates.
If you are intending to refurbish and then sell, lower and shorter-term options may be available to you, starting from as little as 0.7% per month.
When taking out a refurbishment loan, you can expect to pay the following fees.
- Arrangement fees – These are charged to cover the costs of arranging the loan and are usually priced at 1.5% to 2% of the overall loan amount.
- Exit fees – Exit fees are charged by some lenders at the end of the process. These will be based on a percentage of either the loan amount or the gross development value.
- Valuation fees – When undertaking refurbishment works, you must have a surveyor value the property both before and after the project has been completed. Valuation fees are charged by the lender to cover the cost of the valuation.
- Broker fees – If you enlist the help of a broker when applying for refurbishment finance, you will be charged for the services provided. Costs vary depending on the scale and complexity of your project, but fees will cover services such as finding a suitable lender, negotiating the best rate and securing a formal loan offer. It is possible that you will also be charged an administration fee by your broker.
Accessing finance isn’t always easy but there are a few lenders on the market now providing residential and commercial bridging loans for property. Commercial bridging loan Lenders like Glenhawk now provide speedy agreements in principal and flexible repayment terms to support borrowers more effectively.