Bridging for refurbishment
Jonathan Sealey is CEO of Hope Capital
There is a growing demand for bridging loans for refurbishment. Increasing numbers of borrowers recognise the money to be made by the refurbishment of a property and its short-term nature means that bridging is perfectly suited for this purpose.
Bridging also presents an opportunity for brokers, and for borrowers who can get access to funds quickly and save money by not having the debt for more than six to nine months. As long as the borrower knows what they are doing and he or she is putting their own funds into the redevelopment, refurbishment presents a good risk as the LTV should ultimately decrease over the course of the loan as the property is being improved.
Because of this, in some cases a lender will lend at higher loan to values, knowing that the LTV will fall over the process of the refurbishment as the property’s capital value increases.
This is more likely to be the case if a lender has worked on successful projects with the borrower in the past so has the confidence that the borrower knows what they are doing and are good at it.
The risk with bridging for refurbishment from the lender’s point of view is if the borrower doesn’t complete all the required works before the end of the term, or they run out of funds for the refurbishment either because it has taken longer than expected or because they find unforeseen problems they didn’t expect; these can be mitigated but it’s important for a lender to do their due diligence both on the borrower and on the project.
For example, at Hope Capital we always look for borrowers who have a proven track record of property refurbishment.
We make sure they have undertaken a number of projects in that area and have a team behind them who know what they are doing; you don’t want people to chase dreams when you don’t think the exit will be there come the time for redemption of the loan.
This means that in addition to their own valuation, the lender needs to make sure that the quotes for the cost of work that the borrower gives you are realistic and achievable.
The lender also needs a team member or a third party to monitor how the agreed works are progressing at every stage of the development, and milestones should be built into the loan agreement to keep the borrower to a timescale for completion.
It mitigates the risk a little further if the borrower is putting the money into the refurbishment themselves, but it still needs to be monitored throughout the loan term.
Of course there are occasions where issues are found which are not expected. Sometimes it will be possible for the lender to provide extra funds to the borrower to overcome these issues, but this will depend on the loan to value the lender is comfortable with and whether there is any value left in the security property.
For example we were recently able to facilitate a loan at 82% LTV for an existing borrower who wanted to undertake refurbishment of a residential property.
Because we knew the borrower from previously successful loan projects we were comfortable knowing that the improvements would bring the LTV down to 59% at the end of the loan term.