"Demand for refurbishment finance from landlords and property investors is robust at present."
In the current economic climate, the cost of living crisis, increased residential mortgage borrowing costs and uncertainty over property prices are all having an effect on demand for property purchases, with the market best described as ‘subdued’ at the present time.
That said, any market readjustment will often have a positive knock-on effect somewhere else; indeed, as well as a relatively soft residential purchase market, we are currently also seeing strong demand for loans to fund refurbishment. Property owners are concluding that the economics of moving or remortgaging are not as attractive as borrowing to fund improvements to a property. Stamp Duty, legals, moving costs and the possible loss of a (now comparatively) low mortgage rate all add up and can easily make the case for refurbishment being an economically better option.
Demand for refurbishment finance from landlords and property investors is robust at present. While there is a number of over-leveraged property investors in the market who have found it necessary to dispose of assets, there is equally no shortage of investors with more than adequate liquidity who are looking for opportunities to expand their portfolios.
Meanwhile, landlords are facing changes to the Energy Performance Certificate (EPC) regulations, even though there is still uncertainty over when the new regime will come into force. Currently, the proposals mean landlords’ rental properties will need to have an EPC rating of C or better for all new tenancies from 2025 and existing tenancies by 2028.
The cost of implementing changes to a property to secure an EPC rating of C or above will cost £4,700 on average, according to government estimates. While some properties will require substantially more to get up to the required energy efficiency standards, the fact is that the majority will not cost huge amounts. However, most refurbishment bridging loan providers have a minimum loan size of a lot more than £5,000-£10,000.
That’s not an issue when they require funding for medium and heavy refurbishment purposes; large-scale refurbishment often involves a structural change which will entail a significant financial outlay, such as the adding of extensions, the addition of extra rooms, demolitions, property conversions etc.
By comparison, light refurbishment does not interfere with the structure or layout of a property or require planning permission, such as a kitchen fitting, painting, new flooring, plastering etc.
Despite the rise in costs of materials and labour that Covid-related supply chain issues and inflation have wrought, light refurbishment can still require a significantly lower amount than most lender’s minimum loan size.
At Mercantile Trust, we actively look to help potential borrowers who aren’t catered for by most specialist lenders, as part of our commitment to serve the underserved. We do not believe that clients should have to fit into a lender’s rigid model, which might require them having to borrow more than they actually need.
That is why we offer low short-term loan amounts for refurbishment and a number of different options to provide real choice. We currently lend £10,000 and above with a buy-to-let term loan or £25,000 plus with a bridging loan. There is no minimum term on the bridge and both can be taken as a second charge.
Second charge mortgages can be an extremely useful option for landlords seeking to raise capital but understandably less than keen to lose the preferential rate on an existing first charge loan. It means they can keep their existing mortgage in place but still tap into much-needed equity by taking out a second charge buy-to-let loan on any existing properties, for example. Meanwhile, the simplified underwriting process is faster than remortgaging - we can usually release funds in three to four weeks, sometimes even within days.
As well as first and second class bridging and buy-to-let, we also offer a third option: the homeowner business loan (HOBL). Property professionals/business owners can release equity from their main residence for business purposes such as refurbishment, where speed and a shorter term than that of a conventional first or second charge mortgage are needed.
The homeowner business loan is ideal when the borrower’s portfolio might not have the required equity or the first mortgagee will not provide the required consent. Landlords can use the equity within their main residence for refurbishment purposes, enabling them to leave the portfolio as it is, protecting preferential rates, or avoiding incurring costly ERCs.
As the majority of bridging lenders have a minimum loan amount of £50,000 (or often £100,000), brokers can be excused, for thinking of medium or heavy projects when clients talk about refurbishment; but if they are not aware of the presence of lenders who provide smaller loans then they may be denying clients a solution for small/light refurb projects. In today’s subdued market, can brokers really afford to be turning business down, albeit unwittingly?
