Renovation Mortgage: An unlettable property in Scotland

As a specialist in providing finance for holiday and short term let property, we receive enquiries for financing the very simple to the quite complex.

One area of finance where we are experiencing growth, is for mortgages to purchase run down refurbishment properties.

There could be any number of reasons for the shift towards this type of investment, but one thing is for sure, get it right and value can be added.

Conversely, if a developer gets it wrong and the reverse can be true.

This case study is based on a completed deal that we assisted with where the property was located in Scotland.

Renovation Mortgage Case Study

Ben’s Case.

We were contacted by an inexperienced developer, who was looking for finance to purchase an unlettable, renovation property in the Argyll and Bute area of Scotland. The property was a large 9 bed detached property.

The purchase price was £600,000

A local NHBC registered builder had already provided the customer with a schedule of work, indicating a cost of £100,000 to bring the property back to lettable state and a timeframe of 4 months to carry out the refurbishment of the property.

The money for the deposit and cost of the work was available to the customer in cash, from the sale proceeds of a buy to let property.

The selling Estate Agent had indicated that after work, the end value of the completed project would be around £800,000 and another independent agent had verified this figure.

On completion of the project, the customer’s intention was to retain it as holiday let investment property, which he thought would produce a good return over time, plus some family utility.

A local holiday letting agent had visited the property and provided a rental projection, for the low, medium and high season rates, over a 30 week period, based on the completed project specification. £60,000pa gross income was the estimation, based on historic holiday letting in this area of Scotland, for properties that can cater for extended families.

We were asked to structure the finance on the best terms available, to achieve the dual aim of refurbishment and retention.

On reviewing the customers schedule of works, which had been produced by an NHBC registered builder we noted that, the property would be remaining wind and water tight throughout the reinstatement.

When considering where to place the deal, this is an important point, as some bridging lenders won’t accept a deal where the property could potentially be damaged by the elements, particularly where the applicants lack development experience.

In addition, Scotland. The list of lenders that are willing to lend in Scotland, for both bridging and long term holiday let purposes is more limited, than it is in England and Wales.

Most of the Bridging Lenders, that will consider Scotland, confine their lending to a set of postcodes, which will normally be a given radius from the main cities. Bridging lenders have experience of failed development projects, which they take possession of and sell in order to try and get their money back.

Therefore, most want to lend in areas where they know that there is a high level of demand, so a quick sale can be achieved.

However, we told the client that one of our bridging lending partners not only lent to inexperienced developers, but also lent on an unrestricted basis in Scotland, including Islands such as Harris.

Based on the schedule the project would be classed by our bridging finance lender as “heavy refurbishment” and priced accordingly, notwithstanding the fact that stage payments were not needed.

When talking through the options, we recommended a 12 month bridging loan term, as property refurbishments rarely run to time, due to a number of issues.

The loan, we suggested, would be set up on a rolled-up interest basis, over 12 months, however he would only pay for what he used, if the project completed on time, he would receive a rebate.

Our bridging loan broker could have recommended a 6 month bridging loan, but a 9 month term at outset would cost no more, if the project ran on time, however a lot more if it did not and he reverted to penalty interest or worse.

We quickly produced terms for a 70% bridging loan, on the basis set out below:

Gross Loan£384,400
Net Loan£376,568
Monthly InterestRolled up
Term of Loan12 months
Interest chargeable over 12 months.

Rebate if project completed on time, meaning that the overall facility would be less.
Overall Facility£419,959
Exit FeeNone
Value of Securities£600,000
Loan to Value69.9%

Whilst the terms for the bridging finance were being finalised, we started work on the bridging exit loan; the Holiday let Mortgage.

Aware that the key to bridging finance is to ensure the earliest exit for the customer, we approached a lender that could do this for us, so that very soon after the project was completed, the bridging finance could be paid off by a long term and far less expensive holiday let mortgage.

We submitted a full holiday let mortgage application for the customer, with a schedule of works and rental projection. The Lending manager, approved the case and when instructing the valuer, submitted the schedule of works and requested a value based on the completed project. The value came in at £790,000. A mortgage offer to pay off the bridging loan, was offered, before the bridge to purchase had completed!

The purchase completed on the bridge a week later and the nominated builder started work the day following completion, which was an ideal situation when on bridging finance, but it rarely happens.

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