This is a question which has come up a lot recently so I thought I would try and untangle some of the pros and cons of both options. It is very case specific but hopefully this will help you think about some of the other considerations rather than the interest rate alone!
When does a simple bridge work?
The most common scenarios for when you most likely to use a standard bridge are:
- When the cost of your works is less than about £50,000 as you will always need some working capital so it really doesn’t add much benefit to you
- When you have the funds available for the refurbishment for little or no cost and don’t mind having this money tied up (ie. no other projects on the horizon!)
- When you need the maximum loan (usually 75%) on day one
There are benefits to doing it this way round too:
- The overall costs are lower, not only because you are borrowing less. There are QS or asset manager costs associated with refurbishment bridges and there can be an exit fee.
- You will usually get a higher loan on day one as we can usually get to 75% and all the lender fee on top of this.
- You are more likely to have the option to service the loan (pay the interest monthly) if you want to and are able to. This does increase the amount you receive initially.
So how does a refurbishment bridge work in comparison?
A refurbishment loan allows you to borrow the costs of works in arrears as well as a percentage towards to the purchase. You may end up with slightly less on your day one loan, but his does depend on the project and how the figures work. You will always need capital to start the works, and as you spend that it will be reimbursed. The drawdown interest is estimated at the beginning based on the lender’s experience of how draw downs generally work (amounts and timings) and then paid on redemption of the loan. Your broker will know how each lender works in terms of payment for QS for example.
Benefits of a refurbishment bridge?
- You can borrow far more money, so less for you to put in
- You only pay interest on the amount you have borrowed and this is calculated daily. This is a big one! You don’t pay interest on the whole amount, only as you draw it down, which can save about 40% of the interest costs if you borrowed the full amount for the full term.
- This can mitigate the other costs, such as an increased arrangement fee and QS or asset manager fees
Clients are often put off by an exit fee and QS, but looking at the overall cost is so important here.
So what types of projects work for refurbishment bridges?
- Heavy refurbishment projects such as conversions to flats or HMOs
- Commercial to residential conversions
- Large scale refurbishments of single dwellings
But what about planning I hear you say! There are instances that we can complete without full planning. It’s a case by case basis, but if we have a favourable pre app or an alternative use with the current planning then that can work. We can also buy the property on a bridge and then switch to a refurbishment bridge once planning is granted to save you money and add some additional time in.
As always, give us a call if you want to talk through your options. And don’t forget we’ve got plenty of time to get these sorts of cases completed before the stamp duty deadline.