Bridging In, Mortgaging Out: A Scottish Holiday Let Refurbishment

Why an unlettable property needs two loans, not one

A mortgage lender will only lend on a property that is lettable, or habitable, on the day it completes.

A run-down house with no working kitchen, failed heating or damp throughout falls outside that, however good the end result will be.

That is why refurbishment purchases are usually funded in two stages.

A short-term bridging loan buys the property and covers the works period. A long-term mortgage then repays the bridge once the property is finished and can be valued, and let, as it now stands.

Done well, the refurbishment adds value and the investor ends up with a better asset on cheaper long-term borrowing. Done badly, a slipping timetable and a bridge with no clear exit can eat the profit and more.

The case below shows how the two stages fit together, and why the exit is worth arranging before the bridge, not after.

The Client

Ben had sold a buy-to-let property and had the proceeds in cash. He had found a large nine-bedroom detached house in Argyll and Bute on the west coast of Scotland, priced at £600,000. It was in no state to let.

Ben had never taken on a refurbishment project before.

He had, however, done his homework:

• An NHBC-registered local builder had produced a schedule of works, costed at £100,000 over four months.
• The selling agent put the end value at around £800,000, and a second, independent agent agreed.
• A local holiday letting agent projected £60,000 a year gross income, based on 30 let weeks across low, mid and high season. Large houses that sleep extended families are in steady demand in the area.

The Objective

Ben wanted to buy the house, complete the works and keep it as a holiday let, both as a long-term investment and for some family use.

His cash would cover the deposit and the full cost of the works. He needed borrowing that would fund the purchase now and settle onto sensible long-term terms once the house was finished.

The Complication

Three things narrowed the field.

• The property was unmortgageable as it stood. No holiday let lender would lend on it until the works were done.
• Ben had no development track record. Many bridging lenders limit or refuse refurbishment lending to first-time developers.
• The house was in Scotland. Far fewer lenders operate in Scotland than in England and Wales, for bridging and for holiday let mortgages alike. Most bridging lenders that do lend in Scotland stick to postcodes within a set radius of the main cities, where a repossessed property can be sold quickly. A rural Argyll and Bute address falls outside most of those maps.

How We Assessed Options

We looked at three ways to fund the purchase. Only one cleared all three hurdles.

Step 1: A holiday let mortgage from day one. Ruled out. The house could not be let or valued as a holiday let in its current state, so no lender would offer on it.

Step 2: A mainstream bridging lender. Ruled out. Most combined a postcode restriction that excluded the area with reluctance to fund a first-time developer on a project of this size.

Step 3: A specialist bridge, refinanced onto a holiday let mortgage. Taken forward. One of our bridging lenders lends to inexperienced developers and has no postcode restrictions in Scotland, including islands such as Harris. That made the purchase possible, and the holiday let mortgage gave the bridge its exit.

Identifying the Right Route

The schedule of works mattered as much as the lender. It showed the house would stay wind and watertight throughout, with the roof, windows and external walls intact while the interior was reinstated.

Bridging lenders are wary of projects where the building is opened up to the weather, especially with an inexperienced borrower. A sealed building is a much lower risk.

Even so, the scale of the works meant the lender classed the project as heavy refurbishment and priced it accordingly. Because Ben was paying for the works himself, no staged drawdowns were needed. The full loan was released on completion of the purchase.

Why 12 months, not 6

Refurbishments rarely run to time. Trades get delayed, materials arrive late and hidden defects appear once walls are opened. A six-month bridge would have looked cheaper on paper but left almost no margin. If the project overran, Ben would face an extension fee, a penalty rate or a forced refinance under pressure.

With interest rolled up and charged only for the months actually used, a 12-month term cost Ben nothing extra if the project finished early. Repay at month six and the unused interest is rebated.

The longer term was simply free insurance against delay.

The terms we arranged:

Ben’s cash covered the balance of the purchase price, around £223,000, plus the £100,000 of works, Land and Buildings Transaction Tax (including the Additional Dwelling Supplement, as he owned other property) and professional fees.

Arranging the Exit Before Day One

A bridge is only as good as its exit. So while the bridging terms were being finalised, we started on the long-term holiday let mortgage that would repay it.

We chose a lender willing to assess the case on its finished state. We submitted a full application with the schedule of works and the letting agent’s income projection. The lender approved it and asked its valuer to report on the value once the works were complete.

The valuation came back at £790,000, close to both agents’ estimates. A mortgage offer to repay the bridge was issued before the bridge itself had completed.

The Outcome

The purchase completed on the bridging loan a week later. The builder started on site the following day, which is the ideal on bridging finance and rarely happens in practice.

Ben went into the project knowing exactly how and when the expensive short-term money would be repaid. On the figures, his total outlay of around £700,000 produced a property valued at £790,000, projected to earn £60,000 a year gross, a gross yield of about 7.6% on the finished value.

What This Means if You Are Planning a Similar Project

• Get the paperwork right first. A costed schedule of works, independent end-value opinions and a letting projection make lenders far more comfortable, especially for a first project.
• Keep the building sealed if you can. Works that keep a property wind and watertight widen your choice of bridging lender.
• Choose the term for the worst case, not the best. With rolled-up interest and a rebate, a longer term often costs nothing extra if you finish on time.
• Line up the exit at the start. Lenders that will value on completed works can let you know your long-term borrowing before you commit.
• In Scotland, plan for licensing. Short-term lets in Scotland need a licence from the local council before guests can stay, and holiday let lenders will expect one to be in place. Allow time for the application within your project plan.