Refurbishment bridging loans for light and heavy works

What is a refurbishment bridging loan?

A refurbishment bridging loan is a short-term loan secured on a property you plan to improve. It helps fund the purchase, or refinances a property you already own, and with some lenders it also funds the works. It is repaid in one go, by selling the finished property or refinancing it.

It is a type of bridging loan, used where a property cannot get a standard mortgage as it stands, for example because it has no working kitchen or bathroom.

It suits investors and landlords with a costed plan, cash of their own and evidence for the exit. It does not suit a project with no contingency or no realistic way to repay.

Light and heavy refurbishment: where lenders draw the line

Lenders sort projects into light and heavy because the risk, the checks and the release of funds differ. Each lender has its own definition, but the usual test is whether the works are structural or need consent.

A full rewire, new heating or replacement windows sit near the line, and lenders class them differently, so describe the works exactly.

How the money is released

Funds are released in steps, not all at once.

1. Terms and valuation. A lender gives terms in principle on your property details, schedule of works and exit. Its valuer then reports the current value and the expected value after the works.
2. Day-one advance. Once the legal work is done, the lender advances part of the purchase price or current value. The rest comes from your own money.
3. Works. On light projects you usually pay for the works yourself. On heavier ones the lender may fund them in stages: you complete a stage, its surveyor inspects, and that stage's money is released. You need cash to carry each stage until then. Interest is normally charged only on what has been drawn.
4. Exit. You sell or refinance, and repay the loan with the interest and fees due.

What lenders look at

• Experience. Similar projects you have completed. A first project is easier to place when the works are light.
• Schedule of works and costs. Itemised, with realistic prices, a timetable and a contingency.
• Contractor. Who is doing the work and, on larger jobs, their track record and insurance.
• Planning position. Whether consent is needed and whether it is in place.
• End value. The valuer's view of the property's worth after the works, backed by comparable sales.
• Exit. Evidence that a sale or refinance at that value is realistic within the term.

When planning permission or permitted development matters

For an extension, change of use or conversion, a lender will ask for the planning permission, or for evidence that the change is permitted development and needs no planning application. Do not assume it is: in England, a council can withdraw specified permitted development rights across an area with an article 4 direction, and a planning application is then needed. Ask the local planning authority before you commit.

Converting to an HMO or flats

A conversion to a house in multiple occupation (HMO) or to flats raises two questions.

• Planning. In England, a small HMO (a shared house for three to six unrelated people) is use class C4, and changing a single dwelling (class C3) to C4 is permitted development unless an article 4 direction applies. That right does not cover an HMO for more than six residents, which falls outside the use classes, or splitting a house into two or more dwellings.
• Licensing. In England, an HMO let to five or more people from more than one household who share facilities must be licensed, and councils can require a licence for smaller HMOs. Letting an unlicensed HMO can lead to an unlimited fine.

A refinance lender will want both settled. See HMO mortgages for how lenders assess the finished property.

Costs to expect

The lender's offer sets out the actual figures. Expect:

• interest, charged monthly and either paid as you go, retained from the loan or rolled up to the end
• the lender's arrangement fee and, with some lenders, an exit fee
• valuation fees, including inspections before staged drawdowns
• legal fees for your solicitor and the lender's
• any broker fee, agreed before you proceed
• the works, a contingency, insurance and Stamp Duty Land Tax on a purchase

Check the VAT on the works with your contractor and accountant: HMRC's VAT Notice 708 says work on existing buildings is normally standard-rated, but a 5% reduced rate may apply to some conversions and to homes empty for two years, if the conditions are met. The bridging loan calculator shows how interest and fees change what you receive on day one.

How the loan is repaid

There are two usual exits, and the lender will want evidence for yours.

• Sale. You sell the finished property and repay the loan from the proceeds. Allow time for marketing and conveyancing as well as the works.
• Refinance. You keep the property and a longer-term mortgage repays the bridge. For landlords this is usually a buy-to-let mortgage, a route known as bridge-to-let. The new loan depends on the finished value and the rent passing the lender's cover test, and the property must meet the legal standards for letting.

When development finance is the better fit

Refurbishment bridging is built around improving an existing building. Where most of the money goes into construction, such as a ground-up build, a major structural conversion or several new units, development finance is usually the better fit: it funds build costs in stages against the finished value, with a monitoring surveyor checking each stage. Some heavy refurbishments could go either way.

Risks to weigh up

• Cost overruns. Older buildings hide defects, and a lender will not necessarily lend more to cover them. Hold a contingency.
• Delays. Interest runs for as long as the loan is outstanding, and going past the agreed term can bring extra charges.
• A lower end value. A sale may not clear the loan and a refinance may fall short.
• The exit failing. A sale can fall through and a mortgage can be declined.

The loan is secured on the property: if it is not repaid, the lender can take possession and sell it. Borrow against an exit you can evidence, and keep a fallback.

If you or a close relative will live in the property

Whether a loan is regulated depends on the borrower and the use of the property when the loan is taken out, not on the works. FCA guidance draws these lines:

• A home that you or a close relative live in, or will live in after the works: normally regulated. See regulated bridging loans.
• A loan to a company for its business, or on property used wholly for business: not a regulated mortgage contract.
• Investment property bought by an individual wholly or mainly for business purposes, where neither they nor a close relative will live: usually within an exclusion.
• Anything in between: the status must be checked case by case by a firm with the right permissions. You can check any firm on the FCA Register.

What to have ready before you enquire

• The address, price or current value, and the property's condition.
• A schedule of works with costs, a timetable and a contingency.
• The value you expect after the works, with comparable sales.
• Planning documents, or confirmation that none are needed, and any HMO licensing position.
• Contractor details and similar projects you have completed.
• Your exit: sale evidence, or the expected rent and the mortgage you plan to move to.
• Proof of your deposit and the cash to fund the works.

With that, we can tell you whether lenders are likely to treat the project as light or heavy, and request terms for you.