A Beginner’s Guide to Property Refurbishment Finance

Refurbishing or ‘flipping’ a property is an excellent way to boost its value, generate rental income or secure a quick profit through sale.

However, financing such a project can be complex, particularly for beginners. To succeed, understanding the available financing options and their pros and cons is crucial. For first time ‘flippers’, here’s a guide to help you navigate property refurbishment finance.

Bridging Loans

Ideal for investors needing fast funding for light refurbishments or properties requiring rapid turnaround, bridging loans are short-term finance solutions to “bridge” the gap between purchasing a property and arranging long-term finance or selling the property after refurbishment.

In addition to their attractive nature of often being provided within weeks, bridging loans offer flexible borrowing criteria compared to traditional loans making them useful for auction purchases or properties unsuitable for mortgages due to their derelict condition.

It’s important to note that bridging loans typically have high-interest rates, terms that can range between 6–18 months, and require repayment or refinancing quickly. Fees can also be significant (arrangement and exit fees) so if you’re exploring this for the first time, it’s important to account for unexpected bills!

Refurbishment Loans

Refurbishment loans are the most common type of ‘refurb finance’ and see lenders provide investors with a specialist loan tailored to property refurbishment, which can be altered for both light (cosmetic updates) and heavy (structural changes) refurbishments.

As this type of finance is ideal for mid-scale refurbishment projects requiring structural improvements or significant upgrades, lenders will often request investors appoint a project manager or provide a project timeline as funds are released in stages, aligning with project milestones. However, refurbishment finance interest rates are typically more competitive compared to bridging loans because they are available over a longer term.

For beginners exploring refurbishment finance, lenders tend to prefer experience contractors as borrowers, so it may be worth looking at joining forces with experienced developers if exploring refurbishment for the first time.

Buy-to-Let Mortgages with Refurbishment Finace

For new landlords looking to rent out refurbished properties, specialised Buy to Let (BTL) mortgage products allow investors to refurbish a property and then refinance onto a traditional buy-to-let mortgage post-completion. By combining the finance products, investors can simplify the transition from refurbishment to rental income.

Competitive rates are available, but this type of finance has strict eligibility criteria including minimum rental yield requirements and is limited to refurbishment projects that enhance rental value, but don’t require major structural work.

Once investors have a successful project under their belt, there are more finance options available as lenders deem you a reliable source to lend funding too. Examples of finance for experienced property refurbishment borrowers include:

Development Finance

Designed for large-scale refurbishment or redevelopment projects, development finance provides funds in tranches based on project milestones. It is typically used for experienced developers tackling major refurbishment or conversion projects.

For investors looking to take on an ambitious project, development finance offers high loan-to-cost ratios of up to 90%, and is suitable for heavy refurbishments or multi-unit conversions.

However, the application process can be complex and investors will need to provide detailed plans, budgets and previous successes in order to obtain funding. There are strict lending conditions tied to project performance, so you’ll also need to have good cash flow and cost management skills as these loans typically have high fees and interest rates when compared to standard loans.

Second Charge Mortgages

Ideal for investors or property owners needing funds for modest refurbishments with equity to leverage, second charge mortgages allow you to borrow against the equity in an existing property without refinancing the primary mortgage.

Second charge mortgages can be attractive to investors as they have lower interest rates than unsecured loans, flexible repayment terms and keep the primary mortgage intact. But, they increase the risk on your existing property and require significant available equity in order to be secured against.

Mezzanine Finance

Mezzanine finance is a hybrid loan combining debt and equity. A ‘mezz loan’ fills the gap between senior debt and an investors own capital. This type of finance enables larger projects with limited upfront capital to complete, and are loans typically secured against the property or other properties within an investor’s portfolio. But it’s important to know that mezzanine loans are subordinate to other loans, freeing up senior debt for more flexibility.

Due to this, mezzanine loans are riskier to lenders and this is reflected in their high interest rates. They also requires a robust business case to secure making them most suitable for sophisticated investors managing large-scale refurbishments with tight budgets.

What First-Time Property Refurbishment Investors Need To Consider:

When choosing property refurbishment finance, it’s crucial to align the funding type with the scale and complexity of your project. Light refurbishments, such as cosmetic upgrades, may only require bridging loans, or even unsecured personal loans, whilst heavy refurbishments involving structural changes or extensions often necessitate more substantial options like development finance or refurbishment loans.

Budgeting is equally important; create a detailed breakdown of all costs, including materials, labour and permits, whilst also factoring in a contingency of 10–20% to cover unexpected expenses. There’s nothing worse than running out of funds mid-project leading to delays and increased costs, so a well-thought-out financial plan is essential.

An exit strategy is another critical consideration. Whether your goal is to refinance, sell the property, or transition to a buy-to-let mortgage, ensure you have a clear path for repaying the loan. An exit strategy will also help to demonstrate your commitment to lenders, and make you a more compelling borrower to lend funds to.  

Finally, your experience level matters therefore it’s good to get support from peers in the sector.  Many lenders prefer working with experienced landlords or developers, as it reduces their perceived risk so if you’re a first-time developer, consider partnering with an experienced professional or building a solid refurbishment plan to strengthen your case. Similarly, when sourcing finance, appointing a specialist finance broker will help first time refurbishment investors to source the right finance for the project, assessing what your long-term goals are and what you want to achieve. 

Property refurbishment finance can be a game-changer for investors, offering the resources to transform properties and achieve high returns. However, it’s vital to understand the risks and choose a financing option that aligns with your goals and expertise.

At Wharf Financial, our expert advisers have been helping clients source the right finance for their refurbishment projects for many years. We understand how finance fits into the intricacies of property refurbishment, and will be able to advise how best to structure your project and exit strategy. To discuss what type of loan is available to you, get in touch today.