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Refurbishment finance: what is it and who is it for?

Not all property investors, landlords and developers want to take on an “out of the ground” project. Often, there are opportunities to refurbish and renovate existing buildings that are either built for residential purposes or that can be adapted to become houses, apartments or mixed use spaces.

For this type of project, refurbishment loans are available to assist with upgrades, alterations and adaptations. Although the finance required for such projects can be smaller than full property developments, accessing funds can be challenging – particularly for those with little or no experience in property development.

If you are looking to access a bridging loan for property development purposes, here’s a handy introduction to refurbishment finance.

How are bridging loans for property development structured?

Commonly, refurbishment loans are structured to provide funds in two tranches. Lenders provide an upfront advance which is based on a percentage of the purchase price with the balance released to the developer post works and re-inspection. It is also important to note that the loan amount is based on the projected value of the property upon completion of the refurbishment and the anticipated rental income.

Renovation and refurbishment work falls into two broad categories:

Light refurbishment

Light refurbishment can be defined as a project where no planning permission/building regulations are required and the use/nature of the premises doesn’t change overall. A refurbishment of this type may include a new bathroom or kitchen, the rewiring of a property, new windows or a comprehensive redecoration of the premises.

Heavy refurbishment

Larger scale renovations that involve structural changes and require planning permission/building regulations can be defined as heavy refurbishment projects.

The rates associated with refurbishment finance will typically depend on whether you plan on keeping the property as an investment once work is completed or whether you intend to sell the property. Rates for properties you intend to sell will be significantly lower than those you aim to keep as an investment.

What type of fees should I be aware of?

There are a number of fees you should be aware of when arranging a property development finance bridging loan, as with all forms of property finance.

Arrangement fees – As with a residential mortgage, lenders typically charge an arrangement fee. However, these are typically priced as a percentage of the total loan amount whereas many residential mortgages are calculated on a flat fee basis.

Valuation fees – Lenders will put in place a number of steps to ensure the viability of their investment. A valuation will be undertaken before and after refurbishment work and the borrower is expected to cover the surveying costs. The cost will depend on the size of the project in question.

Exit fees – Not all lenders include exit fees in their terms but some will. Before you sign on the dotted line with a lender it is always worth checking the exit fees charged by various lenders as it may have a bearing on which represents the best deal.

Broker fees – if you are working with a broker then it should be accepted that there will be a cost associated with their time and efforts. Broker fees vary greatly and ore typically charged as a percentage of the loan amount.

Given that your broker is being paid for their time, you should utilise their knowledge and experience as best you can during the process. Ensure that you understand the term of your loan, all of the financials and that you are comfortable that the finance fits within your development plan.

For more information visit Glenhawk the experts in property bridging loans.