"The benefit of using bridging loans for funding refurbishments, is that borrowers can get access to the funds quickly and save money, due to the fact they only have the debt for six to nine months"
One of the key factors for the rise is a shift in the reasons why people are turning to bridging lenders. Historically, mortgage delays have been the main purpose for bridging loans, but over the years, the market has shifted. Far more people are now obtaining bridging loans to finance refurbishments.
In Q2 2017, refurbishments were the main reason for obtaining bridging finance. And overall, while mortgage delays are still the main reason, these types of loan now account for less than a third of all bridging loans and refurbishments now account for around a quarter.
In fact, our own figures show an increase in applications for loans for renovation and refurbishments towards the end of 2017, and this is something I expect to continue going into 2018.
We have found that an increasing number of borrowers are starting to see the benefits of short term funding to finance a self-build or improve an existing property. While landlords are increasingly turning to bridging lenders to inject short-term funding either to increase the value of their existing properties or fund a new project.
The benefit of using bridging loans for funding refurbishments, is that borrowers can get access to the funds quickly and save money, due to the fact they only have the debt for six to nine months. The other advantage is that, because the refurbishment increases the value of the property, the LTV will come down over the period as the property is improved.
If the lender has worked with the borrower on successful project in the past, they will often be able to lend at higher loan to values. This is because they are confident the developer knows what they are doing so they know the LTV will fall over the process of the refurbishment as the property’s value increases.
A recent example of a refurbishment Hope funded was a full conversion of an apartment in Richmond. The client had already paid a 10 per cent deposit but needed a high LTV to fully convert the apartment and create an extra bedroom. There was a very short turnaround on the project with the work due to be completed and the property put on the market within three months.
As we had already worked with the client on other projects, we were able to offer a higher LTV than we would usually consider. The 82% LTV took into account the work that was being done to the property, and once the refurbishment was complete, the LTV was down to 59 per cent.
As a lender, there are obviously risks associated with refurbishment. For example, if the borrower doesn’t get the project completed in time, there are unexpected issues, or they run out of funds. But these are all part and parcel of the refurbishment process, and the exit route – selling the properties on or renting them out – is robust. So, as long as the lender has done proper due diligence both on the borrower and on the project, the risks can be minimised, and it is for this reason that I think bridging for refurbishment will continue to grow and grow.
