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June 2021 | High Net Worth

When is self-build not self-build?

Peter Izard is intermediary business development of Investec Private Bank

Lockdown has led to many people re-evaluating what they look for from their home. A growing number are considering refurbishment and renovation, looking to create their dream home without the need to build from the ground up.

As lockdown has led to people spending far greater amounts of time at home, my colleagues at Investec have seen a surge in the number of enquiries from people looking to conduct property refurbishments.

Many people simply want to make changes that will allow them to work from home. Others are looking to maximise their outdoor space.

With the housing market remaining relatively buoyant at the moment, this has also meant prices are high.

The stamp duty holiday has certainly triggered activity lower down in the market, this is still a significant expense for high net worth (HNW) buyers.

This has led to many choosing to save the money they would have spent on stamp duty when moving, and instead considering how they may upgrade their existing home.

What might a typical project look like?

Our clients are often seeking to create their ‘dream home’, without the need to build something from scratch. As such, we have seen many homeowners materially changing either the design or layout of their property.

While many are choosing to renovate their current home, some are also looking to refurbish a new purchase. For example, an Investec client recently purchased a house that was converted into four self-contained units.

As part of the refurbishment, the owner is removing the stud partition walls, taking out three of the four kitchens and redesigning the entire layout. This is just one example of how homeowners are redesigning properties to meet their ‘dream’ requirements.

What are the benefits of the refurbishment route?

It might often be assumed that refurbishment projects can be costly, but the savings potential for homeowners can be substantial in particular cases.

The previous example is a case in point for this. The client previously had a dream house in mind that would have cost them up to £6m. Instead, they purchased this property for £3.5m and will spend around £1m on the refurbishment project – giving them an anticipated saving of £1.5m.

How do lenders usually approach these kinds of renovation projects?

For refurbishment projects, lending is usually secured against the property in question, or the main residence.

Depending on the cost of the project, additional security can sometimes be required. This may see a lender consider taking further security against a second property – such as the client’s buy-to-let (BTL) property, for example.

A crucial factor for lenders to bear in mind is that a property must be worth more than the loan itself.

This will usually see lending structured so that the finance is released incrementally over the course of the project, rather than being provided upfront at the beginning.

For example, we might imagine a scenario where a homeowner has taken out an 80% loan-to-value (LTV) mortgage, and then the property is gutted prior to refurbishment. This may see the value of the property temporarily drop to 70%.

In this situation, the lender would need to work to a phased schedule to release the money in tranches as the work is completed.

Are there challenges to financing deals like this?

Brokers and lenders must consider that there are a number of factors which can make refurbishment projects complex.

First, they must recognise that large-scale refurbishments are extremely fluid. Before a final decision is made, for example, a client may often work through multiple plans. As these designs change, so too will the costs.

Second, banks should be cautious if there are any amendments made to security during a project.

This means any potential lender will need to ascertain what the value of the property will be when it is in its worst state of repair, and how that impacts its risk profile.

Lastly, projects of this nature will usually involve multiple parties beyond the property owners themselves. This might include architects, builders and designers. In this respect, it’s important to remember the human factor; everyone will have an opinion, meaning that the process can take time.

Why do these projects need a unique lending approach?

For projects of this nature, many banks tend to categorise it as ‘self-build’ meaning clients may not get the financing they need to complete a refurbishment.

For this reason, a bespoke lending solution that takes a holistic view of each client’s wealth, personal circumstances and assets is vital.

At Investec, this means we don’t limit our clients to a single route when it comes to their financing needs.

Whether tailored LTVs or loans based on gross development value, we ensure our client’s full income structure is taken into account.

So, if you’re working with a client on a significant refurbishment project, it’s vital that as a broker you understand your client’s goals and the nuances of their financial situation.

Most importantly, understand the financial solution that will allow them to create their dream home.