Straight forward bridge or borrow the refurbishment costs too?

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.

Jackie’s summary: What a year it’s been!

Happy Friday everyone… and it does feel like the one way ticket to ending lockdown is really on its way. It’s been a long time coming but finally there’s light at the end of the tunnel!

As we are now starting to get our vaccines and life is about to get back to normal, I though I would reflect on how the business has been for the last year.

Lockdown started on 23rd March and investors were super busy trying to get properties through and start buying new ones, we had a lot more at auction than usual too.  Perhaps having had Brexit for 3 years, followed by the election; COVID wasn’t going to stop you any longer. Usually, during a downturn, property and finance are hit hard; this hasn’t happened during COVID at all.

Apart from the initial valuation issues and lenders pausing lending for a short period, it bounced back very quickly. For those of us who remember previous economic problems, it has taken a lot longer for normality to resume historically so I think this took us a bit by surprise. The days of the last lockdown full of confusion of what we can do seem like a distant memory thank goodness.

What has inspired me through this is just how inspiring our clients are. It’s very easy to batten down the hatches when things get tough, but the courage and energy of our clients really has blown me away.

We have funded everything from the vanilla refinance, through small refurbishments and all the way to full on development – and everything in between. There were challenges with each deal, and it’s been our solid relationships with lenders which has enabled us to deliver on what our clients have needed. Each day brought new lender decisions and criteria so it really was a tricky time!

With all the issues from furloughed staff, lack of seeing and speaking to people, then coping with part time staff around home schooling (of which I helped with), it’s certainly been one of my most challenging years. There have been so many positives though, for example I have never had so many conversations with underwriters and lenders. Perhaps we all needed more than a quick chase up conversation.

As you will know from my previous blog, it has also given me the push I needed to start my own development. As busy as the year has been, I have spent more time listening to people and being mindful of just what we can still learn. Having something else to focus my time in has been really important, and I’ve thoroughly enjoyed it so far – although I’m sure the hard work is to come we haven’t started the development yet!

The lenders have also become so competitive. After the initial drop out of some, so together with the bullish attitude of others, we are able to now offer better deals than ever.  Also, by spending the time in lockdown conversations, we have really benefitted by having sensible discussions that can help with getting a deal across the line or working through getting a better LTV.

Overall, this year has really shown us just how amazing our industry is at bouncing back – both from a lending point of view and investors. We feel so privileged to be part of the industry who have been able to take advantage of this situation which has caused so many problems for so many. I really hope that this year will change the way we view situations too; we are all becoming more understanding of each other’s difficulties and challenges and I hope that we will continue.

There are always winners and losers in tough times.  I really believe that the tenacity of the investor community has shown just how resilient we are.  Onwards and upwards to June 21st and stay safe.

Jackie is always talking the talk – now she’s walking the walk with her first development!

Happy Friday everyone.  I hope you are all digging deep; however we think everyone is better off than us… they probably aren’t.

This week the blog is on my live case.  As most of you will know, I have been a property investor for about 20 years, but only with vanilla properties with a small refurb thrown in.  I have always wanted to do a development and with so many of our clients going that route, it was really making me envious.

Although I had savings, I don’t have enough experience in this area, so needed someone to work with.

When you chat as much as I do, it doesn’t take long to find out who’s got the appetite for this. I teamed up with someone I have known and worked with for a number of years, as well as his business partners.   After talking about what we could do, we started looking for suitable properties.  It’s important to have a team that can cover all areas; so we were able to delegate the roles of sourcing, development, finance and renting, a solid skill group.

Having not done a lot of sourcing, I really did underestimate its importance; It was time consuming enough just to look at the properties John found.  We looked at all sorts, from converting churches all the way through to large HMOs. We finally decided on an ugly property in Upminster, Essex which had plenty of development opportunities.

The property is a 4 bed house with a 1 bed annex on a good sized plot.  It was originally on the market for £750k, which was too high.  We waited and it dropped to £650k, at which point we put in a cheeky offer of £550k. It was accepted, but they would not allow an option agreement so if we were to proceed we would have to take a chance on the planning.

We intend to build 5 or 6 flats, which will be COVID friendly and eco friendly.  We will try and keep an existing wall, to avoid CIL, which again, reduces costs.

As we couldn’t get the option subject to planning, it was important to see what has happened to the immediate area.  The road has a lot of new builds, both flats and houses, so we can see that the precedent has been set.

We will be getting planning after completion, so I sourced a no ERC product, which will allow us to rent it out for the short term.  Any cash in will help towards costs.  We also insisted on a 2 week gap between exchange and completion so we could start the works required before we rent it out.  The property is a 60s house that had very elderly owners; it was really dated.

It is so important to check exactly what is needed to do to get it rented out, it needed to make financial sense, as it would all be knocked down. Just the painting of a large house is time consuming; it also needed some work to the electrics as they were definitely not tenant safe. As the owner removed all white goods, we sourced good second hand ones off Facebook market place.  They will all be PAT tested to make sure they conform.

We chose this route to avoid bridging; due to the time scales involved in applying for planning. Bridging, as we know, is an important route in a lot of cases but during COVID, this can lengthen the timescales. When you don’t know your timescales it’s worth looking at a longer term and lower cost option.  It really does depend on the property, thankfully this property is tired, but very habitable.

In the 3 months it’s taken to exchange, we have not been idle.  We have instructed the Architect and progressing the drawings and planning.

We complete on the 19th February and it’s definitely given me something away from work and lack of social diary dates to get excited about.

We have benefitted from the maximum SDLT discount, but there are still plenty of deals to be done out there.

How does an 85% LTV bridge sound?

Here we are at Friday again, although the days all seem to be merging into one! I hope you are all doing ok, for those home schooling like me we’ve got one week left before a slight break of half term which I am so excited about! The irony of children’s mental health week being in the middle of a winter lockdown is not lost on me…

This week we genuinely do have some good news though. After a bleak January and with the stamp duty relief deadline inching closer we really do need it.

Shawbrook Bank have this week re-launched their 85% loan to value bridge. There are a few caveats to this, which I will go into but this is a great sign of confidence in the market moving forward. It allows you to borrow an additional 10% on top of the 75% (net of lender fee) for refurbishment costs.

What you need to know:

  • The 10% is for refurbishment costs, so you need to be spending at least that amount on the refurb. You can spend more (and fund it yourself), but if you spend less than the additional loan will be capped at that.
  • This is for a light refurbishment, so nothing which involves planning or building regulations or any structural changes.
  • You do need some experience, one similar project is enough
  • The maximum loan is capped at 75% of the post works value, so we need to give the valuer a copy of the schedule of works and they will give us a figure to work with.

This is brilliant for so many scenarios:

  • It allows you to borrow additional funds for the refurbishment and this is be upfront rather than in arrears which we often see with typical refurbishment bridges.
  • It suits conversions to small HMOs (up to 6 bedrooms)
  • Any residential internal refurbishment which can include kitchens, bathrooms, heating systems and re arranging layouts where no structural works are required.
  • You don’t have a cap on the amount you can spend on the refurbishment, and the additional funds will go towards this.

As always, we are happy to chat through any enquiries you have. We can let you know whether we think your project is something suited to this sort or product or whether something else would work.