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12 March 2018

Bridging for refurbishment – the ideal customer

Refurbishment of properties is a key area of demand for bridging loans. Increasing numbers of people recognise the money to be made from the refurbishment of a property – and the value a short term bridging loan can add, providing funds for the work to be done ahead of a sale or refinance onto a longer term loan.

Refurbishment can cover a number of things from a new kitchen to a complete overhaul of a property. Increasingly there is a need for funds for a change of use. Since the change in planning legislation a couple of years ago a growing number of developers are changing former office accommodation into residential, while the trend to refurbish for buy-to-let continues, despite the stamp duty increases. Sometimes this is just sprucing up a property to enable it to be let, other times it is transforming a property into an HMO to let to multiple people. The extent and purposes for refurbishment are extensive and bridging can be the flexible friend that enables it to happen.

From a broker’s point of view the person carrying out a refurbishment for buy-to-let has to be the ideal customer as it can mean multiple repeat business. First the short-term loan needs to be arranged to provide the funds for the refurbishment. In a second bite at the cherry, many developers will usually convert that into a long-term loan once the work is complete. Regardless of whether they do that or sell the property, they may well go on to develop other properties so are likely to need the service of a broker for further loans or mortgages. The broker who understands bridging and does a great job on the first bridging loan could find the client turns into a very good long-term prospect.

It may seem obvious why a bridging lender would also want to lend to such a client. As long as the borrower knows what they are doing and he or she is putting their own funds into the redevelopment, refurbishment presents a good risk. In some cases a lender will lend at higher loan to values, knowing that the LTV will reduce during the process of the refurbishment as the property’s capital value increases. It is therefore always worth a broker speaking to the lender directly and not just taking the published LTV as read.

A lender is also more likely to stretch the LTV if they have worked with the broker in the past or on previous successful projects with the borrower. The lender then has the confidence that the borrower knows what they are doing and are good at it.

This is important as the risk with bridging for refurbishment from the lender’s point of view is if the borrower doesn’t complete all the required works before the end of the term. Or if they run out of funds for the refurbishment, either because it has taken longer than expected or because they find problems they didn’t expect; these can be mitigated but it’s important for a lender to do their due diligence both on the borrower and the project. A good broker who knows their client and what they do also plays a valuable part in this.

For example, at Hope Capital we always look for borrowers who have a proven track record of property refurbishment. We make sure they have undertaken a number of projects in that area and have a team behind them who know what they are doing; you don’t want people to chase dreams when you don’t think the exit will be there come the time for redemption of the loan.

A good lender will then monitor how the agreed works are progressing at every stage of the development; they will also build milestones into the loan agreement to keep the borrower to a timescale for completion.

Of course there are occasions where unexpected issues are found. If the lender has kept on top of the project and recognises it is a good risk it will often be possible to provide extra funds to overcome these issues, but this will depend on the loan to value the lender is comfortable with and whether there is any value left in the security property.

For example Hope Capital were recently able to facilitate a loan at 82% LTV for a broker and borrower we had worked with before. The borrower wanted to undertake a refurbishment of a residential property. Because the borrower was known from previously successful loan projects we were comfortable the improvements would bring the LTV down to 59% at the end of the loan term. This enabled the borrower to take advantage of an opportunity to increase the value of their property substantially, resulting in an offer for £225,000 above the initial purchase price.

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