If you're a first-time investor, an established developer, or you dabble here and there within the property, choosing the correct finance for acquiring and renovating a property is as important as choosing the design, builders and materials.
When you find a 'fixer-upper' with the purpose of either refinancing and letting out the property or selling, you'll need a suitable financial package to help execute the project correctly.
Conventional investment mortgages do not give you the option to do this, so you will need to opt for a renovation loan.
This article explains in detail everything you need to know about renovation loans, how they work, how to apply for one and how to secure the best deal.
In This Article, We Will Cover The Following topics
What Is A Renovation Loan?
A renovation mortgage is a specialist type of loan that enables a borrower to obtain a loan that is equal to the post-renovation value of a property, also known as GDV (Gross Development Value).
The benefit of taking the gross development value into consideration is it gives the buyer the requisite funds to make both the purchase and cover the refurbishment costs. The additional finance can be serviced and paid off in monthly repayments alongside your mortgage.
Let's look at a simple example:
You're purchasing a property worth £200,000. The estimated cost to develop the property is £70,000 on it, but the GDV. (i.e the cost after the works are complete) is £350,000. Based on a normal deposit requirement of 25%, you would borrow £262,500. 75% of the estimated value
Generally, renovation loans are offered with funds released in instalments as the renovation work progresses. This could require the lender needing to inspect the property a few times involving fees.
Why Choose a Renovation Loan?
Renovation loans are used by more savvy developers and property investors to fund their next project as it offers speed, in some cases at a lower cost and with the flexibility required if you need to refinance or exit by selling and not being subject to ERCs. (Exit Costs)
Renovation loans are a specialist type of short-term mortgage and unlike a traditional mortgage, the short-term nature of the loan typically lasts between 12-24 months and has many advantages. Once the property has finished its works the increased loan-to-value will give you access to more competitive borrowing if executed correctly.
There are a few high-street banks that do offer renovation mortgages, however, the vast majority only consider loans for habitable properties. A habitable property is a residence that is fit for human occupation and is free of serious defects that might pose a risk to one's health and safety.
Most High Street Banks And Mortgage Lenders Won't Give You A Mortgage If:
The property is derelict or in very poor condition
The property needs a full conversion (a change of use)
Other constraints consist of:
Time: Can take up to 6-8 weeks to process an application. Some of the best properties are purchased during a time of an auction where 28 days are needed as soon as the hammer falls.
Extra Costs: There are likely to be further fees when it comes to monitoring the renovation work in progress.
Lack of Flexibility: Once the work is completed, you are normally tied to the mortgage term for a longer fixed period of 2 to 5 years and can be subject to Exit costs if you have other plans with the property.
How Does a Renovation Loan Work?
A renovation loan can 'bridge' the gap in funding a renovation project and is secured against the property. Every renovation loan needs a defined exit strategy for repaying the total sum borrowed which is usually a sale of the property or refinancing to a longer-term investment buy to let mortgage
If you do not wish to sell the property, the increase in value which results from the renovations must be sufficient to repay the whole loan, plus the interest.
How Do You Pay For A Renovation Loan?
Renovation bridging loans generally quote and charge interest rates monthly instead of annually. This is because you may need the loan for less than a year.
There are options to pay the interest monthly (i.e service) or roll up the interest and pay the total loan at the end of the term. To get a basic understanding of the breakdown of the bridging loan costs, have a look at our bridging loan calculator here.
Rolled-up interest allows borrowers to keep their monthly outgoings as low as possible, freeing up liquidity to meet the ongoing costs of renovations.
Generally bridging loans can usually be repaid anytime after 3 months and you only pay interest for the period you take out the loan. For example, if you take out a loan for 12 months and manage to finish the project in 6 months, you will only pay interest on the 6 months. Many bridging loan lenders now do not have exit costs giving you the flexibility to exit whenever you like.
What Are The Benefits of a Renovation Loan?
To become approved, this is very much dependent on the security in question, rather than an assessment of the borrower's credit profile or earnings. Short-term finance can be arranged in a matter of weeks. Have a look at a few of our cases studies here
Bridging loans can be used for:
- Buying at an Auction
- Residential Conversions
-Self Build Projects
- Commercial and buy to let renovation projects
Higher Loan to Value
Some Bridging loan providers are prepared to go as high as 80% Loan to Value or 100% LTV if there is additional security depending on personal circumstances.
Getting the Best Renovation Loan With Accelerated Finance
Many specialist bridging loan lenders can only be approached through broker intermediaries.
We have expert knowledge of a variety of property finance products across the whole market.
We work with bridging loan lenders who are prepared to provide the following:
Market-leading bridging loans for renovations from £50,000 to £25M
Lower rates for £1M+ loans
Terms from 3 months to 3 years
Loan to Value (LTV) of up to 80% (can be more if other assets are in the background)
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Accelerated Finance Limited only considers applications for commercial or investment properties. Accelerated Finance Limited is not regulated by the financial conduct authority and only provides unregulated loans via our network of lenders. Your property is at risk if you fail to make payments on a Mortgage Contract.
Please note that Accelerated Finance Limited and its employees do not give financial advice or recommendations on any product.