Photo by Urban Island Property

The chaos of the first three months of this year has finally finished—will things calm down? I expect so for a while, and the stamp duty rise will slightly impact purchase prices.

This month, I want to talk about bridging. As you know, we are big fans of bridging finance; it really does give you the opportunity to recycle your money quickly with property projects. With the right property, you should make back the cost of the bridge.

A popular question from our clients is how to structure a bridge when works are to be carried out. Generally, people are looking to put the minimum amount of their own funds into a deal. We have various options with bridging finance, so what are your options?

Borrowing for the Purchase and Refurbishment Costs

This seems like the obvious answer—why wouldn’t it be, if the lender can fund both the purchase and the refurbishment? Well, it may not be for a couple of reasons…

The lender will always work back from your Gross Development Value (GDV) and will usually lend up to 65% of this figure in total. They will fund all refurbishment costs, so when you deduct this (along with fees and interest) from your maximum loan, it needs to be a profitable project in its own right or achieve the maximum day-one loan of 70% of the purchase price.

Costs are funded in arrears, meaning you’ll need around £25k in working capital to start the works.

We are very dependent on the GDV, so you must be cautious with that figure. If you require planning permission to carry out the intended works, we must base our figures on something for which you already have planning. This could affect your maximum borrowing or mean you need to go through a two-stage process (a standard bridge followed by accessing refurbishment funds once planning is approved). There must be a viable option that has planning permission; if the current planning does not make the project profitable, lenders won’t lend in anticipation of future planning, as they need something that is profitable at completion.

The maximum loan on day one is also determined by the cost of the works, and the lender will want a contingency factored in. So, make sure you understand the true cost—if not, the figures will be adjusted once the valuation and asset manager visit take place. This could reduce your day-one loan, meaning you might need a larger deposit, potentially causing cash flow challenges.

An alternative is to take a higher day-one loan and then fund the works yourself.

Maximising Your Day-One Loan

We now have several options to maximise your day-one loan, rather than having a lower day-one loan and funding the works yourself. The advantage of this type of loan is that you are less concerned with the GDV (although lenders still consider it), making it more likely you’ll achieve your objectives.

We can lend up to 85% of the net day-one value for light refurbishments and 80% for heavy refurbishments. The total gross loan must be less than 75% of your GDV, compared to 65% with a refurbishment loan, so there’s more flexibility if your deal is less profitable.

You will need to show that you have the funds available to carry out all the works; this must be cash in your bank account. Gifts or loans from investors are acceptable, as long as there’s money available to repay the loan upon refinancing. Make sure it all makes sense.

Advantages of Using This Type of Bridging

• We have a couple of lenders who will provide this type of bridge, followed by the refinancing afterwards. This means lower legal fees, arrangement fees, and we can use the same valuer, thus reducing the overall cost of bridging. 
• It’s a simpler, quicker process, which makes it ideal for auctions and quick sales. 
• You don’t need to provide a contingency for the work costs, so with a larger refurbishment budget, this can reduce the amount you need to show. However, I would always suggest factoring this in! 

The options available to you will depend on your total costs, profit, and the split between purchase and refurbishment costs. I’d be happy to discuss how this would work for your deal! Feel free to get in touch to book a call here.

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.