A Guide To Refurbishment Loans: What Are They And When Should You Use Them?

What Is Refurbishment Finance?

Like a bridging loan, refurbishment finance is a short-term, interest-only loan, secured against property. However, unlike a bridging loan, refurbishment finance also takes into account any plans for renovation or conversion of a property – By considering the cost of planned works and their impact on the value of the property, these loans are able to provide additional funding, beyond the typical 75% Loan To Value of a BTL  mortgage or bridge. Refurb Loans typically run for a period of 6 to 18 months and are popular due to their speed and flexibility.

The Two Main Types Of Refurb Loans

Refurbishment Loans can be split into two categories, each with its own positives and negatives depending on the property and the nature of the works planned:

I – Standard ‘Two-Part’ Refurbishment – The facility is essentially split into two parts:

1. The Initial or ‘Day One’ facility – This functions similarly to a standard bridge, with an upfront loan made towards the purchase or refinance of the property, up to 75% of the Current Market Value (CMV). Interest on this is generally retained (calculated upfront).
2. The Drawdown or ‘Build’ facility – Additional funds, which are allocated to paying for the intended refurbishment works. These funds are released during the term of the loan, in stages as works progress, allowing the lender to monitor the refurbishment and ensure their funds are being used appropriately. Interest is typically rolled-up.

When combined together, the initial and drawdown facilities make up the overall gross loan, which is typically capped at a percentage of the GDV/ Standard Refurbishment lenders will typically prioritise funding the cost of works in full, with any remaining funds inside of their LTGDV being allocated to the purchase. This Structure offers:

• A phased release of refurbishment funds, ideal for longer projects as interest is only charged on funds that have been used.
• Refurbishments followed by a monitoring surveyor on behalf of the lender, with visits for each drawdown of refurbishment funds.
• Funding for up to 100% of build costs, with the remainder of the facility allocated to purchase or refinance of the security.
• Up to 75% LTV against the current ‘day 1’ value of the property.

These facilities can also be split into Light and Heavy refurbishments – Lenders will usually consider a project ‘Heavy’ if planning is required, if there is a change of use, or if the works involve significant structural change. Whilst rates will change (heavy refurbishments will incur a slightly higher rate) and underwriting/monitoring requirements can be slightly more stringent for heavier projects, the overall structure of the loan is typically quite similar.

II – High Leverage ‘Self-Fund’ Refurb Loans – The entire loan is released on day 1, with all interest retained, but the final value (GDV) of the refurbishment is considered when deciding the loan amount.

These facilities are generally based on an Loan To GDV of up to 75%, with an additional cap against the current value of the property (CMV) to ensure that the loan does not exceed the value of the property pre-refurbishment. They typically feature:

• A higher initial leverage and more funds upfront, ideal for projects where acquisition is a large proportion of overall cost.
• Refurbishments self-funded by the borrower, meaning minimal involvement/monitoring from the lender during the term of the loan.
• Generally lower interest rate due to less complex structuring of the loan and reduced underwriting requirements, compared with standard refurb.
• Up to 85% LTV against the current ‘day 1’ value of the property.

These facilities are typically only available on Light refurbishments (no structural works or planning permission required), due to the lack of monitoring and reliance on the borrower to fund build works.

Key Features of Refurb Loans:

• Flexible loan structures: Starting from as little as £150,000, and tailored to provide funding for acquisition and works on a property as needed.
• No interest payments: Retained and Rolled-Up interest means no monthly payments, helping ensure borrowers have strong cashflow for the refurbishment.
• Fast approval: Refurbishment loans often have quicker application and approval processes than traditional mortgages, and often a less intensive underwriting process due to not requiring monthly repayments.
• Flexible property-backed security: The loan is secured against the value of a property, but will consider both the current and future state of an asset in underwriting. Properties that would be considered not mortgageable due to condition or work required are regularly accepted.
• Early repayment options: Most Refurb loans allow for repayment mid-term without penalties, and do not require full use of the refurbishment funding, giving borrowers more flexibility in when and how they repay the loan.

When Are Refurbishment Loans Useful?

Refurb loans can be a practical solution for a variety of projects where flexibility is key. Here are some common scenarios where they’re particularly effective:

1. Residential Refurbishments
   Whether a light renovation, or a heavier reconfiguration requiring planning, there are a range of refurbishment options that can provide the funding required for both the purchase/refinance and refurbishment of residential BTL/investment properties.
2. HMO Conversions
   Refurbishment Loans can also be used to modify standard residential properties into small or large Houses in Multiple Occupation, allowing investors and landlords to acquire a property and funds works necessary to maximise their rental returns, before refinancing onto longer term finance
3. Conversions/Change Of Use
   For properties where PD applies, or planning is in place where required, Refurbishment Finance can be used to convert a previously commercial property to a residential use.
4. Rapid Acquisitions
   As the market becomes more crowded, competition for properties with refurb/conversion potential can be fierce. Refurbishment Finance can be completed more quickly than a standard BTL/Commercial Term Facility, allowing borrowers to move on properties with potential quickly.
5. Commercial/Mixed-Use
   Refurbishment Loans are also available for a wide range of use classes, including commercial and mixed-use properties. Any property with potential for improvement and strong future income can be a potential fit.

Things to Consider Before Taking a Refurbishment Loan

While Refurb Loans offer unique advantages, it’s essential to approach them with careful planning. Keep the following in mind:

• Well-Planned Exit: Have a clear plan for the refurbishment, including a schedule of works, costings, and a strong contracting/professional team. The refurbishment plan should also include a strategy for repaying the loan at the end of its term, whether through sale, refinancing, or another method. This will be a key part of the underwriting process, and lenders must be confident that it is feasible.
• Contingency: As with any major project, property refurbishments have risks and can experience delays or cost-overrun. Whilst many lenders will look to assist with issues that might arise, building some additional time and refurbishment funding into your plans is a must, with a 10% contingency typically being best practice.
• Risk of Default: As these loans are secured against property, failing to repay could result in the loss of the asset being used as security property.

Final Thoughts

Refurbishment Loans are an excellent solution for those who need flexible, short-term financing for a property project. Their wide range of uses makes them a useful choice to consider when compared to more traditional property finance. However, it is critical to have a detailed plan for the project, and to understand all the risk involved before committing to a refurb loan.

To navigate the complexities of refurbishment finance, working with a specialist broker is highly recommended. They can help identify the most suitable loan product for your circumstances, ensure all costs and fees are clear, and help the process run smoothly from start to finish.