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Understanding the refurbishment options

A bridging loan is a well-established, essential tool for both brokers and developers operating in the UK property market, offering short-term financing solutions for property transactions and developments.

A variation on the bridging loan is a refurbishment product, which typically comes in two flavours: the light and the heavy refurbishment loan. Understanding the differences, their applications, and their implications can help both brokers and developers establish what may be the best option in any particular case.

As the name suggests, light refurbishment loans are typically aimed at properties that require minimal work. This often pertains to non-structural modifications. For instance, projects that involve cosmetic enhancements, such as painting, replacing doors, windows, and floors, or updating bathroom and kitchen fixtures, generally fall under this category. There certainly would be no need for planning permission.

Light refurbishment loans tend to be easier to secure since the scope of work is perceived to be less risky for the lender. These loans are ideal for developers or investors looking to make quick, superficial enhancements to a property with the aim of either selling it on at a profit or renting it out. The turnaround for such projects is typically quick, which means the borrower can repay the loan in a shorter timeframe.

Landlords looking to perform upgrades to rental properties in order to improve the rating of their Energy Performance Certificate (EPC) would typically use a light refurbishment loan to achieve this, with the option of remortgaging onto a ‘green’ buy-to-let mortgage after securing a better EPC.

At London Credit, our light refurb bridging loans are available on a first-charge basis up to £3.5m and the term is up to 18 months. The maximum loan to value (LTV) is 70%.

Heavy refurbishment loans, on the other hand, cater to projects that are more intensive and often involve structural changes. These might include extensions, loft conversions, significant remodelling, or projects that require planning permission.

Given the larger scope of work and potential complications, heavy refurbishment loans are generally considered higher risk than their light refurbishment counterparts. This perception of risk is reflected in the lending criteria and the rates offered by lenders.

For developers or investors, a heavy refurbishment project usually means a longer-term commitment, and potentially higher rewards. These projects can transform dilapidated properties into high-value real estate, or a viable HMO, for instance. However, they also come with their set of challenges, including the potential for unforeseen complications and cost overruns.

At London Credit, our heavy refurb bridging loans are also available on a first-charge basis up to £3.5m, with a maximum term of 18 months. The greater risk with heavy refurb however is reflected in the 65% maximum LTV.

For brokers, understanding the intricacies between light and heavy refurbishment bridging loans is crucial. Recommending the right type of loan can mean the difference between a successful development project and a financial misstep for their clients.

Brokers must be diligent in assessing the scope of the project, the anticipated timeframe, and the potential risks involved. In the case of light refurbishment, the evaluation process might be more straightforward, and the loan might be easier to secure. However, for heavy refurbishment projects, brokers might need to ensure their client provides more substantial evidence of the viability of the project, detailed plans, and assurances of the developer's ability to manage potential challenges.

Developer clients must be transparent about their intentions for the property and realistic about the anticipated timeframe and budget. It's crucial to factor in contingencies, especially for heavy refurbishment projects. Developers should also be prepared for a potentially more rigorous application process when seeking heavy refurbishment loans.

As with any bridging loan application, the lender will want to see that the client has a viable exit strategy. In the case of heavy refurbishment, the existence of a serious ‘plan B’ (in the event the first exit strategy becomes unviable) will be looked on favourably by the lender in today’s challenging market conditions.

While both light and heavy refurbishment bridging loans offer valuable solutions for property developers and investors in the UK, they cater to different project scales and complexities. Understanding these nuances, the risks involved, and the requirements for each can ensure a smoother transaction and successful property development. Brokers play a pivotal role in this landscape, guiding developers and clients through the intricacies of each loan type and ensuring the best financial decisions are made.

 

Simon Michael, Operations Manager at London Credit

Understanding the refurbishment options
29 September 2023

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