Refurbishment Finance

Refurbishment finance lenders provide the tools that property developers need to quickly seize and escalate renovation projects from beginning to completion

There are many situations in which refurbishment finance can enable developers to seize opportunities that would otherwise be beyond their reach. By making use of the highly flexible and easily-adaptable lending solutions that are on offer from refurbishment and renovation financiers, it’s possible for developers to quickly and confidently move to bring properties into a finished, saleable condition. Without access to these financial lifelines it’s impossible for developers to escalate their projects in a reasonable timeframe, which can lead to a loss of profitability; it’s vital that any refurbishment project receives adequate funding as and when it’s required.

Because refurbishment finance is a form of secured lending, it’s exceptionally important for borrowers to consult a financial advisor before proceeding with a loan. The requirement for borrowers to provide security in the form of a charge against assets means the developer could potentially face repossession if they fail to repay, so while refurbishment finance is widely used and highly adaptable, it should always be considered carefully before making a decision.

What role does refurbishment finance play?

The refurbishment and renovation of property is a highly lucrative sector of property development, and attracts investors of all types. This makes it an exceptionally competitive industry with only a finite number of opportunities to go round; developers need to be able to move quickly when opportunities present themselves, or else lose out on potential business. When speed is of the essence it’s vital for developers to secure properties as quickly as possible, but this can often present a hurdle; developers rarely keep large reserves of cash on hand, and even if they do they’re reluctant to commit large sums of capital to a project. This makes it vital to borrow the necessary funds instead, but mainstream lenders and banks are usually slow and sluggish to act - it can take weeks to submit a full application, after which the bank may well decide not to go ahead with the loan after all.

Refurbishment finance is a quick, adaptable type of loan that can be put to many different uses, and is ideally suited to the demands of property development. The loans on offer from lenders operating in this sector can be put in place in a very short space of time, and some lenders can even put money in your account in less than a week. This makes it easy for developers to put a financial strategy in place that enables them to move forward with their plans on schedule and on budget.

How a refurbishment finance loan is structured

As previously mentioned, refurbishment finance is a type of secured lending. This means that the borrower must provide an asset that’s used to “back” the loan, which typically consists of the property which is to be refurbished. The lender takes out a charge on the property, which entitles them to reclaim their loan by repossessing and selling the property if the borrower doesn’t pay them back. Realistically this isn’t an ideal outcome for a lender, who would much rather recoup their money through repayment; in many cases, borrowers can seek a loan extension or refinance the loan through another lender rather than facing repossession. It’s important to bear this in mind, though, because while the property may not actually be repossessed the costs of refinancing or extending the loan may wipe out any profit to be made.

Refurbishment loans are used as a short-term financial solution, and are designed to achieve a specific goal - in this case, bringing a property to saleable or mortgageable condition. The term of a refurbishment loan reflects this limited objective, and renovation loans are rarely of longer duration than 6 months (though longer terms are available for larger projects).

At the end of the term, the borrower will enact their “exit strategy” to complete the loan’s repayment, which usually consists of either selling or mortgaging the property. Mortgages are not generally available for a property that’s uninhabitable, so as soon as refurbishment is complete developers usually seek a mortgage as a long-term financial solution. Even if they’re not intending to retain ownership of the property they may decide to seek a mortgage before marketing the property because unless they have an immediate buyer, the costs of maintaining the short-term refurbishment loan until a buyer is found can be expensive.

Types of Refurbishment Finance

There is a huge array of loans available from the many different lenders operating within this sector, and the terms and conditions of each loan can vary significantly between different financiers. However, these loans generally fall into one of two categories; refurbishment loans and renovation finance.

Renovation finance

Renovation finance is the heavy-duty reworking of a property. This may be because it’s derelict and requires extensive work to restore to habitable condition, and can also include structural work. Renovation finance is generally used for projects which include extensive remodelling of a building and the wholesale replacement of structural elements. For instance, a property that needs a new roof, electrical and plumbing works to be installed could be said to need renovation.

Refurbishment loans

Refurbishment is a catch-all category for less extensive work, and generally refers to smaller-scale internal modifications to a property. While there may be a structural element to refurbishment, this is generally cosmetic rather than fundamental in nature. For instance, a 1960s home that’s having a wall knocked through, new windows fitted and wooden floors put in would generally be considered to be undergoing extensive refurbishment, not renovation.

Using Refurbishment Finance

Refurbishment finance is a highly flexible tool which enables property developers to quickly act on opportunities that present themselves, which is particularly vital in the high-pressure industry of property development. Because of the highly competitive nature of this industry, developers who utilise specialised refurbishment lenders are able to outpace and outperform their competitors, moving ahead with their projects and bringing them to completion smoothly and on schedule. The highly flexible nature of refurbishment loans also means that developers can take out a bespoke lending solution that’s focused towards their specific needs and business objectives.

Frequently Asked Questions

What is a bridging loan?

A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.

What is a development finance used for?

Development finance can be offered against both residential and commercial property. Development loans are designed to help developers fund refurbishments, renovations, or conversions of existing property or to build brand new properties on a ground-up basis.

What are the key areas of development finance?

Development finance can be used for new build projects, commercial and residential developments, renovations, conversions or for the redevelopment of existing properties. Loans can be used for a vast range of different property types.

How do you determine exactly what type of development finance you need?

By assessing how extensive the project is, how long it is likely to take and how much it is likely to cost in a worst and indeed a best-case scenario. Refurbishment bridging loans will cover a majority of light and heavy refurbishment projects but for more extensive development projects including ground-up builds of one or indeed multiple units, development finance can potentially cover both the land purchase and build costs

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