Refurbishment Bridging Loans

If you’re planning structural improvements to a property, whether it’s your home or a commercial premises, a refurbishment bridging loan can offer fast and flexible short-term funding to support the work.

Bridging loans can be used for a variety of purposes, including the purchase or remortgage of a property and covering the full cost of refurbishment works. Their flexible repayment structure can also be arranged around the expected timescale of your project.

In this guide, we explore the main benefits and potential drawbacks of using a refurbishment bridging loan to finance a property renovation.

What is a refurbishment bridging loan?

Bridging loans can be used for a wide range of purposes rather than being designed exclusively for refurbishment projects. However, property investors, landlords and homeowners often choose this type of finance when carrying out substantial renovations, extensions or modernisation work for several reasons:

• Focus on future value - lenders may consider the property's expected value once the refurbishment is complete, commonly referred to as the gross development value (GDV). This can make bridging finance suitable for properties that may not currently meet the requirements for a traditional mortgage.
• Upfront fund availability - although funding may sometimes be released in stages, it can be possible to borrow enough upfront to begin the project. Depending on the circumstances, the loan may also cover the purchase of the property before refurbishment work starts.
• Benefit from property bargains - refurbishment bridging loans can allow property investors to purchase un-mortgageable property, including properties bought at auction. Buying a property requiring significant work at a lower price may provide an opportunity to increase the potential profit margin following renovation.
• Simple exit strategy - the sale of the refurbished property can often be used as the loan's exit strategy. This may mean there is no need to rely on another property or asset within a wider portfolio to repay the loan.

Light refurbishment vs heavy refurbishment bridging loans

Lenders will usually classify refurbishment projects as either light or heavy, depending on the scale, complexity, type of work involved and overall cost. This classification is an important factor in determining the loan pricing and the loan-to-value (LTV) or loan-to-GDV level a lender may be prepared to offer.

Although individual bridging lenders use their own criteria, projects are generally grouped as follows:

Light refurbishment

Light refurbishment normally covers cosmetic upgrades and non-structural work that does not require planning permission. Building regulations approval may not be necessary in many cases, although certain works can still require appropriate certification, such as electrical or gas installations.

Light refurbishment bridging loans may be available at up to around 75%-80% LTV because the work usually presents less structural risk. Interest rates may also be lower, and the loan can often be released as a single lump sum.

Work that may be classed as light refurbishment includes:

• Installing a new kitchen or bathroom within existing rooms

• Plumbing or electrical upgrades, such as fitting a new central heating system

• Extensive plastering or new flooring

• Replacing windows and doors

• Decorating and other internal cosmetic improvements

• Minor repair work

Heavy refurbishment

Heavy refurbishment bridging loans are generally used for projects involving substantial structural work or major changes to the layout of a property. A project may also fall into this category where planning permission or building control approval is required.

Because these projects carry greater risk, lenders may assess borrowing against the gross development value (GDV) rather than the current property value. Maximum borrowing is often around 65%-70% of GDV. Instead of releasing the full loan at once, lenders will commonly provide funding in stages, known as tranche drawdowns.

An independent monitoring surveyor (IMS) may be required to inspect and approve each completed stage of the works before the lender releases the next tranche of funding.

Examples of heavy refurbishment can include:

• Adding a structural extension to an existing property

• Converting substantial areas, such as a loft or basement

• Moving load-bearing walls or converting a single dwelling into separate units, including HMO properties

• Fully restoring an uninhabitable property

• Carrying out extensive structural timber work, including roof replacement

Eligibility criteria

Bridging lenders generally place greater emphasis on the security available and the viability of the project than on the applicant’s income when assessing refurbishment bridging loans. They will want evidence that the proposed work is realistic and achievable, with any required planning permission, building regulations approval and relevant certifications in place.

Although eligibility criteria differ between bridging lenders, you will typically need to meet the following requirements:

• The property being refurbished and/or any additional assets offered as security should have sufficient equity and clear ownership

• A detailed project plan will usually be required, including a full budget, schedule of works and expected timescales

• You will need a credible exit strategy, such as selling the refurbished property or refinancing onto a standard residential or buy-to-let mortgage

• Lenders may favour applicants who can demonstrate previous refurbishment experience. If you do not have relevant experience, they may expect you to appoint suitably qualified project managers and contractors. This is particularly important for heavy refurbishment projects

Top UK lenders for refurbishment bridging loans

Here are some of the leading UK bridging lenders that provide competitive products for both light and heavy property refurbishments:

However, keep in mind that there are many more bridging loan providers available, each with their own criteria and terms. To ensure you get the best finance for your project, whether that’s a bridging loan or an alternative form of renovation funding, it’s best to speak to a broker with experience in this niche.

How to apply

Whether you’re an experienced property developer or taking on your first renovation, it can be beneficial to discuss the proposed works and your exit strategy with a specialist broker before applying for a refurbishment bridging loan.

When do you start repaying the loan?

When arranging short-term finance, it’s important to understand how a bridging lender is likely to assess the scale of your refurbishment project. Bridging loans are generally more flexible than standard mortgages when it comes to releasing and repaying funds, but the type and extent of the work can influence how the loan is structured.

Repayment will also depend on how you choose to pay the interest. Most bridging lenders offer the following options:

• Rolled-up interest: You do not make monthly interest payments during the loan term. Instead, the interest is added to the balance and repaid alongside the loan at the end of the term. This can suit borrowers who intend to sell the refurbished property and repay the full amount from the sale proceeds.
• Retained interest: The lender calculates the expected interest charge at the beginning of the loan and sets this amount aside from the available facility. This means you do not make monthly interest payments during the term, with the retained interest used to cover them instead.
• Serviced interest: Similar to an interest-only mortgage, you pay the interest each month and repay the original loan amount at the end of the term. Because monthly payments are required, lenders will usually want evidence that you have sufficient income to afford them.

You can use our bridging loan calculator to estimate how much you may be able to borrow and see how the overall cost could vary depending on the interest repayment method you choose.

Alternative ways to fund a refurbishment project

Although bridging loans can provide flexible short-term finance for both minor and extensive renovation work, they will not be suitable for every borrower or project. Depending on your circumstances, you may also want to consider the following alternatives:

• Renovation mortgages: A longer-term finance option that is generally more suitable for owner-occupiers carrying out improvements to their home.

• Further advance: If you already own a property with sufficient equity, borrowing more from your existing mortgage lender could help fund the refurbishment.

• Development finance: This specialist form of finance may be better suited to major development work or large-scale conversions, such as converting a multi-unit commercial property into residential flats.

• Unsecured personal or business loans: For smaller refurbishment projects, such as decorating or repair work costing less than £25,000, an unsecured loan may be an option. However, availability will depend on the lender, as not all providers allow borrowing for renovation purposes.

Frequently Asked Questions