You’ve found a property with fantastic potential, but now what? Before you even think about swinging a hammer, understanding the scope of your renovation is paramount – not just for your budget, but for securing the right financing. This is where the distinction between light and heavy refurbishment becomes critical.
What Exactly is a Light Refurbishment?
Think ‘cosmetic uplift.’ A light refurbishment focuses on improving the aesthetics and functionality of a property without altering its fundamental structure. This typically includes:
- Redecorating: Painting, wallpapering, new flooring.
- Kitchen & Bathroom Upgrades: Replacing units, tiles, and fixtures without moving walls or significant plumbing reroutes.
- Minor Repairs: Fixing existing issues like leaky taps or damaged plaster.
- Rewiring & Replumbing (if like-for-like): Replacing old systems with new ones in the same locations.
Why is this important for finance? Lenders generally view light refurbishments as lower risk. The property remains habitable throughout the works, and the project timeline is usually shorter and more predictable. This often translates to:
- More Favourable Light Refurbishment Bridging Loan Terms: Lenders are often more comfortable advancing a higher loan-to-value (LTV) against the current property value.
- Quicker Approval Processes: Less due diligence is typically required compared to a heavy refurbishment.
- Potentially Lower Interest Rates: Due to the reduced risk profile.
If your project falls into this category, you’ll be looking for a light refurbishment bridging loan designed for quick, cosmetic improvements.
Stepping Up to a Heavy Refurbishment
Now, let’s talk about the big guns. A heavy refurbishment involves significant structural changes, extensions, or alterations that fundamentally change the property’s layout or use. This can include:
- Extensions: Adding new rooms or increasing the footprint of the property.
- Loft Conversions: Transforming unused attic space into habitable rooms.
- Basement Excavations: Creating new living areas underground.
- Structural Alterations: Moving or removing load-bearing walls, changing roof structures.
- Commercial to Residential Conversions: Transforming an office building or shop into residential units.
- Subdivision: Converting a single dwelling into multiple flats.
How does this impact your heavy refurbishment finance? Heavy refurbishments are inherently more complex and carry a higher risk profile for lenders. The property may be uninhabitable for periods, planning permission is often required, and unforeseen issues can arise. Because of this, you can expect:
- More Detailed Underwriting: Lenders will want to see comprehensive plans, budgets, and often a professional valuation that considers the after-works value.
- Phased Funding: Funds might be released in stages, tied to the completion of specific milestones, rather than in a lump sum.
- Potentially Higher Interest Rates: Reflecting the increased risk and complexity.
- Lower Initial LTV: Lenders might be more cautious with the initial advance, with further funds released as the project progresses and value is added.
For these larger-scale projects, you’ll need specialised heavy refurbishment finance or a property renovation loan type tailored to significant structural overhauls.
Understanding the Costs: Beyond the Loan Amount
It’s crucial to understand that the “net loan amount” you receive from a bridging loan is not simply the headline figure. There are several costs and fees involved that will be deducted from the gross loan, meaning you’ll need to factor these into your overall capital contribution.
Key Costs and Upfront Fees to Expect:
- Lender Arrangement Fee (or Facility Fee): This is the fee charged by the lender for setting up the loan. It’s typically between 1% and 2% of the gross loan amount. Crucially, this fee, along with rolled-up interest (if applicable), is deducted from the gross loan amount before the funds are released to you. This means that while it’s not an immediate cash outlay from your pocket, it directly reduces the net capital you receive for your project.
- Broker Fees: If you’re working with a broker (which I always recommend for specialist finance!), they will charge a fee for their services. This can vary, but typically ranges from 0.5% to 2% of the loan amount. Some brokers might charge an upfront application fee (which could be in the hundreds or low thousands of pounds) with the remainder payable on completion, while others may only charge on success, which would typically be deducted from the loan proceeds. At At Sunrise Commercial Finance, our goal is always to provide value and clarity on all fees from the outset.
- Valuation Fees: A professional valuation of the property is almost always required to assess its current market value and, for heavy refurbishments, its projected end value. These fees vary significantly based on the property’s value and complexity, but you can expect them to range from £300 to upwards of £2,000+. This fee is typically paid upfront and is non-refundable.
- Legal Fees: Both your solicitor and the lender’s solicitor will incur costs for due diligence, drawing up loan agreements, and registering charges. You will generally be responsible for both sets of legal fees. Your own legal fees can start from around £750, while the lender’s legal fees, which you cover, can be in the range of £950 to £2,000+ plus VAT, depending on the complexity of the deal. Some or all of these legal fees may need to be paid upfront.
- Interest: Bridging loan interest rates are typically quoted monthly, ranging from 0.49% to 1.5% per month, although they can be higher for riskier projects or complex scenarios. This translates to an annual equivalent of 6% to 18% or more. Interest can often be “rolled up” into the loan, meaning it’s added to the capital and repaid at the end of the term. If rolled up, it will be deducted from the gross loan amount at completion, reducing your net funds received. Alternatively, it can be serviced monthly, requiring direct cash payments.
- Exit Fees: Some, but not all, lenders charge an exit fee when the loan is repaid. This is typically around 1% of the original loan amount or a fixed fee. It’s crucial to clarify this upfront. These are usually deducted from the redemption proceeds.
- Administration Fees/Drawdown Fees: Smaller administrative charges, often in the hundreds of pounds, may be levied for processing the loan or releasing funds in tranches. These are typically deducted from the loan amount or specific drawdowns.
Your Capital Contribution: What to Expect
Given that the maximum gross loan will typically be 75% LTV, and several fees (like the arrangement fee and rolled-up interest) are then deducted from this gross amount, the net funds you receive will be less than 75% LTV. This means you’ll need to have a significant amount of your own capital to put into the deal.
- Initial Equity Contribution: Most bridging loans will offer a maximum LTV of up to 75% for residential properties (often lower for commercial or land deals, e.g., 60-65%). This means you will need to contribute at least 25% of the property’s purchase price as your initial equity. For example, on a £200,000 purchase, the maximum gross loan might be £150,000 (75% LTV), meaning you put in £50,000.
- Covering Deducted Fees: From that gross £150,000 loan, the arrangement fee (e.g., 1.5% = £2,250) and rolled-up interest (e.g., £9,000 for a 6-month loan at 1% per month) will be deducted. So, your net received loan would be £150,000 – £2,250 – £9,000 = £138,750. This means that for a £200,000 property, you’re effectively funding £200,000 – £138,750 = £61,250 in cash, not just the initial £50,000 (25%). This demonstrates that your actual cash input will be greater than the minimum 25% LTV, due to these deductions.
- Funding Upfront Cash Costs: On top of your equity contribution, you will need to cover the upfront fees that cannot be added to the loan. These commonly include the valuation fee and your own legal fees. These are crucial initial outlays that must be paid to get the loan process started.
- Contingency for Works: For refurbishment projects, especially heavy ones, lenders will assess the Loan to Gross Development Value (LTGDV), which is the loan as a percentage of the property’s value after the works are completed. They might fund a high percentage of the purchase price, but then only release funds for the works in stages as value is added. This means you need initial capital for the first phase of works or a significant cash buffer to ensure the project can commence and reach the first drawdown milestone. As a rule of thumb, having 10-15% of the total project costs (purchase + renovation) available as a contingency is wise, beyond your initial deposit and accounting for deducted fees.
In summary, while bridging loans are incredibly flexible, they are not 100% funding solutions. You will typically need to contribute at least 25% of the property value, and often more (e.g., closer to 30-35% or even higher for some deals), once arrangement fees and rolled-up interest are factored in as deductions from the gross loan. Additionally, you’ll need funds for upfront fees like valuation and your own legal costs, and a contingency for the works themselves.
Which Bridging Loan is Right for Your Project?
The key takeaway is this: don’t try to fit a square peg in a round hole when it comes to bridging finance. Misrepresenting the scope of your project can lead to delays, complications, and even outright rejection of your loan application.
- For light, cosmetic updates and minor repairs: A light refurbishment bridging loan is your ideal choice. It’s streamlined and designed for speed, with typically fewer upfront demands on your personal capital for project costs (though valuation and legal fees remain).
- For structural changes, extensions, or conversions: You’ll need heavy refurbishment finance. While the process might be more involved and require more detailed financial planning and initial capital, it’s structured to support the complexities of your ambitious project.
At At Sunrise Commercial Finance, we specialise in understanding the nuances of your project and connecting you with the right funding solution. We work with a panel of specialist lenders who understand the unique requirements of both light and heavy refurbishments across England and Wales. Our expertise ensures you get clear, transparent information on all costs and the most likely capital contribution required for your specific deal, so there are no surprises.
Ready to Get Started?
Don’t let finance be the stumbling block to your property development dreams. Whether you’re planning a quick cosmetic flip or a comprehensive conversion, understanding the right type of bridging loan and its associated costs is your first step to success.
Visit our website today at https://www.sunrisecommercial.co.uk/ to discuss your project and discover how we can help you secure the funding you need to bring your vision to life.
For more information contact us for a fees free chat.
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