Heavy refurbishment loans are used by experienced developers to raise money for structural improvements to a property.
This can include PDR, extensions, conversions and change of use projects.
As a rule of thumb, if planning consent and/or building consent is required then the refurbishment finance needed is classed as ‘heavy’.
What is heavy refurbishment finance?
Heavy refurbishments are much more involved than a light refurbishment project, often requiring planning permission and building regulations sign off. They also carry a higher risk because of the size and level of work required to complete them. Heavy refurbs typically include large side and rear extensions to an existing residential property, converting commercial properties into residential use or HMOs.
Sometimes a project requires only the addition of some stud walls for one large house in order to turn it into an HMO but that still counts as heavy-duty renovations due to planning and change of use.
Heavy refurbishment projects will usually cost more than 15% of the property value. The loan is essentially a short term bridging loan, with terms of 12-24 months.
Read more on light refurbishment finance.
How does heavy refurbishment finance work?
A refurbishment loan provides short term finance, by way of a bridging loan, so that a property can be purchased and then refurbished. A typical loan term could be 12-24 months.
The planned work is usually extensive, requiring change of use, planning or building consent. Typically the cost of the improvements will exceed 15% of the property value.
The loans are set up as interest only and secured on the property as either a first charge or second charge.
Interest on the loan is charged monthly but interest payments can be rolled up and paid at the end.
Lending is based on the initial purchase price and then the gross development value (GDV). Funding of around 70-75% will be provided for the initial property purchase and then further funds released to cover the improvement works. The lender’s valuer will be asked to confirm the estimated post-works value of the property.
What is heavy refurbishment finance used for?
It is used to finance property refurbishments and conversions that are either structural or require building/planning consent. Change of use scenarios eg residential to HMO will also need this type of ‘heavy’ finance.
- Structural works
- Loft conversions
- Change of use
- Planning permission required
- Building consent required
An example of a heavy refurbishment project would be:
- The refurbishment and conversion of a 4 bedroom house into a 6 bedroom house of multiple occupation (HMO)
- Converting a single property into separate flats
- Adding a basement
- Adding another storey
Types of acceptable property
As the lenders are predominantly providers of bridging loans the type of property they will accept is very varied.
- Residential property
- Residential buy to let
- Residential buy to sell
- Holiday lets
- House in Multiple Occupation (HMO)
- Mixed use properties
- Commercial property
Who can apply for refurbishment finance?
These loans are a type of short term bridging and can be taken out by:
- Pension funds
The borrower should have previous experience of a successful refurbishment project.
Refurbishment loans, as with bridging loans, can be arranged relatively quickly. The lender will want to understand the works required and carry out their own due diligence with regards to any consents that may be required.
No minimum income
interest roll up
How do you repay the loan?
Refurbishment loans are a type of short term bridging finance, so the lender will only offer a short term of 12-24 months. They will then expect the loan, and any accrued fees and interest, to be settled in full.
When applying for the loan you will need to advise the lender of your loan exit strategy, for the lender this is an important factor.
How you repay the loan (your exit strategy) will depend on your intentions for the property.
If you intend to sell the property, post improvement works, then this will be the method of repayment or exit strategy. You should allow enough time for the sale process before the loan is due to be repaid.
If you wish to keep the property, either as an investment or to live in then you will need to find alternative long term finance. This means remortgaging the property to pay off the bridging lender.
You should be aware of the ‘6 month rule’ when remortgaging a property within 6 months of buying it. A lot of the mainstream lenders need you to have owned the property for 6-12 months before granting a remortgage.
If you are likely to be in this situation it is probably a good idea to go through your refurbishment project with one of our brokers prior to purchase. You will then get an idea on what is and is not possible.
Why use a broker?
At Drake Mortgages our team of brokers have specific expertise in development and refurbishment loans.
Property refurbishment can be financially rewarding but it does need the right type of financing. We know the lenders that are actively looking for refurbishment business. By working with us you will get an unparalleled level of loan choices, together with the help and advice of our whole team.