In current property market conditions, a trend that we are often seeing with landlord clients is the purchase of property that either requires refurbishment work, or conversion from commercial to residential use.
Their journey if you like is from the identification of a property investment opportunity (Point A), through refurbishment, to the property being in a lettable condition to tenants (Point B).
Landlords then immediately add capital value to their long-term investments, as well as maximising rental yields.
There is a traditional funding route to follow for limited company property vehicles (SPVs) which can be broken down into two distinct stages; a Bridging Loan to fund the purchase and refurbishment works, and a Buy To Let mortgage when the property is in a lettable condition, which refinances the original Bridging Loan and is the landlord’s long term finance vehicle.
Some lenders only advance the purchase funds for the Bridging Loan, others offer a ‘Refurbishment Bridge’ where a loan for purchase is combined with a contribution to the ‘cost of works’.
At the point when the property is valued for purchase, the surveyor is also provided with a ‘schedule of works’ that are to be carried out, and they provide the lender and client a second valuation estimating the value of the property with completed refurbishment work (the ‘Gross Development Value’). This allows the lender to determine the overall viability of the project, as well as the amount of the ‘cost of works’ that they would be willing to lend, if that was a part of the product.
I want to set out a Case Study based on a client’s recent proposal, though I am omitting interest rate detail as they are linked to an individual applicant’s details, and each property on a case-by-case basis, in the eyes of the lender’s credit team.
- Client acquired a former solicitors office and car park behind with planning for conversion into 4 x 2 bed flats
- Purchase price £345,000 and a max LTV from this lender for Day One was 70%
- The refurb bridge was taken over 12 months.
- 6 months interest was retained on Day One, and the second six months was serviced monthly.
- At the time of the purchase, the surveyor valued the Gross Development Value (GDV) at between £800,000-£860,000 (£200k-£215k per flat) – the lender based their maximum lend to the client off the lower end of the scale at £800,000
- Cost of works was estimated by the client at £175,000, and he looked to the lender to lend this in full in staged payments over the Bridging period. Any costs beyond this the client would self-fund
|Lender Day One maximum LTV||70%|
|Lender Day One maximum loan||£241,500|
|Client Purchase Deposit||£103,500|
|Gross Development Value (GDV)||£800,000|
|Lender maximum Loan To Gross Development Value (LTDGDV)||65%|
|Lender maximum LTDGDV||£520,000|
|Day One purchase loan||£241,500|
|Cost of Works (est.)||£175,000|
|*To be added: Fees and Retained Interest|
|Total Bridging Loan||£416,500|
*To be added in before the calculation of the total bridging loan: the product arrangement fees and the retained interest element
**Additional costs, including but not limited to valuation survey, client’s own legal fees, lender’s legal fees, stamp duty (if applicable), any further serviced interest payments and any ‘contingency’ refurbishment costs, need to be budgeted for by the client
The additional costs detailed will slightly increase the client’s LTGDV, but it will comfortably sit below the lender’s maximum threshold, and therefore in this case was an interesting one for the lender.
At the point at which the works are completed, the client completes their ‘exit’ from the Bridging Loan and puts in place a limited company Buy To Let mortgage. This can be available up to 75% LTV (subject to eligibility) and should clear the Bridging Loan plus funds back for the client’s original purchase deposit and refurb costs.
The client now retains equity in a much improved investment property, with an enhanced rental yield.
Every landlord and property investor is in a different position, and separate products for refurbishment and to let the property might keep the options open for them that they want; similarly, I have heard many clients complain about ‘going through a purchase process twice’, with not just the costs but the time it takes which could be better spent on another issue or project.
For these clients there have been some great product innovations from lenders in this funding area.
‘Bridge To Let’
More recently, several lenders have brought to market a combined product – a ‘Bridge To Let’ if you like – so that borrowers only have to go through one set of initial valuations, legal work and underwriting to secure the initial Bridging Loan which then rolls into a pre-agreed Buy To Let mortgage when the refurbishment work is completed.
Instead of just presenting the case for an ‘exit’ when applying for the original Bridging Loan, a Bridge To Let is arranged with the same lender that is going to provide the Buy To Let mortgage, and is arranged under a single up-front application process.
An investment property can be bought using a Bridging Loan, the client then then completing the schedule of refurbishment works to the property to make it lettable, and then when completed transition into an already approved Buy to Let mortgage.
In a single application process up front you guarantee your exit strategy from the Bridging Loan, greatly reducing delays when you have completed the refurbishment works but are still waiting to put a tenant into the property; gets rid of what you might call a ‘dead spot’ for your investment where you money is not working for you.
- A single, up-front, application and underwriting process
- One valuation process for the Bridging Loan and the Buy To Let mortgage
- Significantly reduced conveyancing fees – not two totally separate processes
- One lender issuing two simultaneous offers at the start of the project
- Some lenders allow you to fix the rate of the Buy To Let mortgage at the point of original application
Every month it seems another lender is adding a ‘Bridge To Let’ to the product range, and the hassle and costs that they reduce make them an attractive proposition for property investors.
Every client’s situation is different, and each proposal has different attributes that need to be considered to ensure that the client achieves the most suitable solution. By working with lenders that are innovating their product range and increasing client options, we improve our chances of reaching our goal: the best possible outcome for the client’s requirements.
How do you want to get funded?
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