How is the loan structured?
Refurbishment finance is structured to provide funds in two tranches. The lender will provide an initial advance based on a percentage of the purchase price with the balance released post works and re-inspection. The actual loan amount is based on the projected value of the property post-refurbishment and the anticipated, achievable rental income.
An investor purchases a property for £200,000 and plans to spend £40,000 refurbishing it to increase its value to £300,000. The lender agrees a loan of £210,000 which is 70% of the end value. Initially the investor receives £140,000 which is 70% of the purchase price. Once the works have been completed and inspected the lender advances the remaining £70,000, giving the investor £30,000 “free cash” post works.
For lenders, there are two kinds of property refurbishment:
This is where no planning permission / building regulations are required and where there is no real change to the overall use / nature of the premises. Common light refurbishments would include new bathroom, new kitchen, redecoration, rewiring, new windows etc.
Typically, refurbishment finance for standard buy to let houses and flats is available up to 75% of the end value with rates starting from around 5.5%. There are also finance options for more complex properties including HMOs and multi-unit freehold blocks of flats as well as finance for applications made through limited companies or from first time investors. As you would expect, the more complex the proposition, the higher the rate you can expect to pay.
This is where there are structural changes to the property and planning permission / building regulations are required.
What sort of rate can you expect to pay?
Options will depend on whether you wish to keep the property as an investment post refurbishment or whether you intend to sell the property after works. If you intend to keep the property as a buy to let then you may get rates starting from say 5.5% for light refurbishment and slightly higher for “heavier” projects.
If you are looking to refurbish and sell then shorter-term options are available starting from c.0.7% per month. Give us a call to talk through the options.
As with all property finance, a variety of fees will be due. Here’s a list of what you can expect to pay.
These fees are charged by the lender for arranging the loan and are typically priced at 1.5% to 2% of the loan amount.
Not all lenders apply exit fees which is why it is always worth talking to a broker to find the best deal. Exit fees are charged at the end of the loan and can be a percentage of the loan amount or sometimes, the gross development value which can really push up the project costs.
As part of the application and risk assessment process, lenders will instruct a surveyor to value the property both before and post refurbishment works. The scale of these fees will depend on the size of the project.
These are the fees that brokers charge for finding a suitable lender, negotiating a price and getting the client a suitable, formal loan offer. All brokers charge differently. At Mortgages for Business we typically charge between 0.5-1% of the loan amount depending upon the complexity of the case. Normally we only charge fees if we are successful in getting the client a formal loan offer. We may also charge an administration fee but we will always tell you exactly what you can expect to pay up front.
What to do now?
Give us a call to talk through the options. If you’re still not convinced, take a look at some of the refurbishment projects we’ve worked on recently.