Search Around For The Best Finance For Renovation Projects.
Lenders require a property to be habitable from day one before they will advance a buy to let loan.
Many buy to let lenders are reluctant to advance mortgages against properties which require even minor works of repair, modernisation or improvement. The rationale behind this is that in lending on the property they are taking the potential income into account, and they want to see that income coming in as soon as possible. So if the property requires repair or modernisation, there won’t be an immediate stream of income, which puts the lender at risk if they ever had to repossess.
For this reason most lenders will insist that the property is in a letable condition from day one, and as a consequence of that I have seen instances where loans have been declined, based upon the valuer’s comments when he has inspected the property, for what would usually be considered fairly trivial reasons.
However, the good news is that some lenders will lend on properties requiring a limited amount of renovation or refurbishment by way of a light refurbishment loan.
The definition of light refurbishment is a little vague but it essentially covers situations where the property requires a cosmetic upgrade, and perhaps minor improvements, such as a new kitchen or a new bathroom.
The way that light refurbishment loans work is that the lender will advance, say, 70%, depending upon their LTV, of the purchase price of the property, or the value, whichever is lower, and will usually also retain a sum of money equivalent to the cost of undertaking the improvement or repair works.
At the time of the initial mortgage application the valuer will be asked to provide an opinion of value of the property in its current un-refurbished condition, and also an opinion of value of the property upon completion of the works.
When the borrower informs the lender that the works have been completed, the valuer will re-inspect, and as long as the valuer is happy with the standard of the works that have been undertaken, the sum of money retained to cover the cost of the works will be released, and any extra equity.
The mortgage will be re-calculated to be 70% of the value of the property after improvement, and any extra equity resulting will be released at the same time.
There are pros and cons with using light refurbishment loans.
The first disadvantage is that only a few buy to let lenders offer a light refurbishment or limited refurbishment loan, so there’s not much choice.
The main lender is Paragon, although the terms of their loan make it very limiting, but others include Shawbrook, Kent Reliance, Aldermore and the Saffron Building Society.
Also Precise offer a bridge to let facility whereby they bridge the refurbishment and then the loan can be swapped to a more traditional buy to let type loan.
The second main disadvantage is that currently loan to value ratios are limited. Most tend to be around 70%, although Paragon offer a 75% LTV, although this comes with strings attached, Kent Reliance offer 75% LTV, and Saffron offer an 80% LTV.
This can be compared with the best LTVs available for standard buy to let mortgages which include 85% offered by Kent Reliance, and 80% by The Mortgage Works, Mortgage Trust and Saffron.
Another potential disadvantage, depending on what you buy and where, is that most lenders have relatively high minimum valuations for their light refurbishment products. Paragon has the lowest at £75,000, and Saffron and Kent Reliance only lend on properties over £100,000, which is fairly typical.
Paragon describe their limited refurbishment scheme as being for a property that is “currently habitable but where minor works would enhance the overall appeal to the market and its potential rental income. Minor works might typically include the replacement or refurbishment of kitchens and bathrooms, renewal of services or decorative attention. The scheme is not for works that require planning permission, permitted development rights or building regulations approval, and should not involve any major structural works to the property”.
That is a fair summary of how all lenders see light refurbishment.
In the next post we’ll look at some of the light refurbishment buy to let mortgages that are currently available.
If you are interested in renovating property, either to sell-on at a profit, or so you can refinance and borrow all of your money back out to spend on your next project, you might be interested to know that I have rewritten and updated my best selling ebook The Successful Property Renovator’s Workshop.
This is a ‘course in a book’, which will take you through the whole process in detail including how to do your sums to make sure you make a profit, how to raise finance for the purchase and the project, and how to refinance when you have completed.
The good news is that I’ve taken all my knowledge and experience, which I have gained over the years from doing countless renovation projects, and have put it all down on ‘paper’ in this ‘easy to read’ ebook. In it I’ll show you how you can find, plan, prepare and do each project to ensure your own profitable success every time.
And none of this is just dry theory. This is all based upon my own, personal experience of refurbishing and renovating property, which is why I use case studies of actual properties I’ve refurbished, along with photographs, to illustrate many of the points made.
I’ll show you all the things I did right, so you can copy them, and all the things I did wrong, so you can avoid them. They say that ‘trial and error’ is one of the most effective ways of learning but I can save you the time, the grief and the cost of having to go through it all. Hopefully I can save you months, even years, of trying to work it all out for yourself!
To find out more, please go to: http://www.thepropertyteacher.co.uk/the-successful-property-renovators-workshop/
Here’s to successful property investing
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor