Smaller Refurbishment and Development Loans

12 November 2024

At Peritus we believe that every client counts and no matter what size of loan you are looking for, we are the people to help you. 

This month, I’m focusing on smaller loans. Maybe you are a first-time developer, dipping your toe in the water of refurbishment and development and looking for a steer on finance? Maybe you’ve carried a couple of ‘flips’ by raising money against your residential mortgage but you are now ready to take the next step. 

But what’s available? How much will it cost? Will you be eligible? 

 

Let’s break it down. 

There are many companies that offer finance specifically to fund refurbishment loans. Depending on the scheme, lenders would usually fund all the build/refurbishment costs then lend a further amount towards the purchase. 

 

Let me give you an example.  

The property is currently an office on the ground floor with a tired residential unit above. There is planning to convert the office to a flat and refurbish the current residential unit. The purchase price is £100,000, the build costs are £45,000 and the end value is £200,000. 

You may be able to borrow the following:- 

£45,000 build costs (100%)

£60,000 towards the purchase (60%)

This means you’ll need cash/savings of £40,000 + purchase costs and valuation fees. 

 

So you’ve borrowed £105,000 net, what goes on top of that? 

Arrangement Fees – These are charged by the lender. Usually around 2% of the loan amount. On a net loan amount of £105,000 the arrangement fee would be £2,100. It’s quite common to add this to the loan. 

Interest – For the purposes of this example, let’s say the interest rate is 1% pm. Interest on the amount you borrow to purchase the property (+ the arrangement fee) will be charged from day one for the whole of the loan. And let’s say you drawdown £20,000 in month 3 & £25,000 in month 5. Interest is only charged once you’ve drawn the money down. The interest charge on this loan, if the loan is kept for the full 12 months would be £12,040. Interest will be rolled up onto the loan and repaid when the loan is paid off.

This means that your gross loan amount is:-

£105,000 + £2,100 (arrangement fee) + £12,040 (interest) = £119,140

In this case, this is 60% of the Gross Development Value (“GDV”). You may be able to borrow more but this depending on the property, the scheme and your experience. 

 

Is there anything else you need to pay? 

Yes, the property will need to be valued and that will cost in the region of £1,000. Unlike a residential valuation, the valuer will be asked to comment on the scheme, the proposed costs, the end and current value and the security in general. On refurbishments and smaller developments, the majority of lenders don’t insist on a Quantity Surveyor’s report, but they may ask their asset manager to visit the site, which is a cost to you of around £100-200. 

You are also liable for both your solicitors and the lender’s solicitor’s legal costs. 

Broker Fees – This is the fee your broker will charge to arrange the loan for you. Our standard fee is 1% of the loan amount. Although this is always open for negotiation. 

 

You’ve seen how much it’s going to cost, and you haven’t run for the hills! Good! 

The next step is to present yourself in the best possible way to the lender. Your broker will help you with this. It is important that the lender has faith in you being able to complete the project. If you don’t have any experience, ensure that your builder and/or project manager does. Maybe even consider a joint venture with a more experienced developer so that you can learn from them and the lender knows there is experience in the team. Also, bear in mind the exit. What is selling in the area, is your end value justified by other sales? How long are properties taking to sell? Engage with local agents to ensure you are pitching the end product at the correct price.

What are you waiting for? Go and find that property that needs some TLC and get developing! 

Words by Michelle Dean