Photo by Snug Properties

This month, I want to talk you through how refurbishment bridging works. It’s one of our most popular products, as it allows you to borrow the maximum amount to purchase and convert your property into an HMO. It’s also one of the most complicated products to understand, as there are so many moving parts!

Before I talk about how it works, here are the key points to consider with these loans.

• The works are funded in arrears, so you’ll need to have a starting pot of around £25,000 (or more for a larger refurbishment), which will then be refunded. This does mean that for smaller projects (under around £80,000) it may not be the most effective way to fund the deal.

• The GDV is key to the deal. It needs to be profitable enough to allow you to borrow enough, and the lender wants it to at least break even in order to fund it.

• We can only work with definite figures. So if a figure is dependent on planning, then we can’t use it. We often use a back-up plan (for example, a conversion to a 6-bed rather than a 7-bed HMO if planning isn’t approved), but if the property is in an Article 4 area, this does make things more tricky. It’s definitely something to consider and speak to me about!

So, how does it work?

The GDV, as I said, is key to the loan.

We can usually lend you 70% of that figure. From there, we deduct:

• The cost of the works, including professional fees and a 10% contingency
• The interest, assuming you keep the loan for the full term (usually 12 months)
• The arrangement fee
• The lender’s legal fees, broker fee, and any other expenses

What you’re left with is your day one loan, which goes towards your purchase.

Let me give you an example. Rates and fees will be dependent on the lender, your experience and the type of project, so I’m happy to discuss those in more detail if you’d like.

GDV	£540,000
Purchase price	£272,000
Total gross loan	£378,000
Funded works	£150,000
Day one net advance	£185,851

The net advance is what you actually receive once all the other costs have been deducted.

So you’ll still need around a 30% deposit, as well as Stamp Duty, your legal fees and enough money to get the works started.

This is a real example of a property in Luton, for a conversion to a 6-bed HMO outside of an Article 4 area. It’s a relatively straightforward conversion with no planning required, but with good demand for HMO room rentals and sales, meaning we have strong comparables for the valuer.

What happens when you refinance?

One last part to consider is what you’ll then get back out on refinance.

As we’ve already lent you 70% of the GDV (perhaps a little less if you don’t keep the bridge for the full 12 months and/or don’t draw down all the funds for the works), there often isn’t much extra to release when you refinance at 75% loan-to-value.

That additional 5% equates to around £26,000 in the example above, so by the time you’ve paid your fees, there’s often not much left.

If you’re looking to borrow from investors for the deposit, this needs to be factored in.

How will that loan be repaid? Ideally, we wouldn’t want any investor borrowing still outstanding after the refinance.

Final thoughts

As always, if you’d like to discuss this, or any other mortgage query or situation you have, please book in a call here. I’d be more than happy to help.

About the Author:

Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.