Understanding bridging: Heavy refurbishment finance

The learning objectives for this article are to:

Property refurbishment is a popular way for investors to maximise returns, by renovating a building to increase its capital and rental value. Renovation, of course, can cover a large scope of projects – from decorating and updating fittings through to large structural changes and even altering the use of a property.

In general, where a renovation project doesn’t require planning permission or building regulations it’s considered to be light refurbishment, whereas more involved projects, which can potentially provide investors with better returns, would be heavy refurbishment. Lenders will often offer different products for light and heavy refurbishments, reflecting the different nature and risk profile of the different types of renovation projects. For the purpose of this CPD, we will be focusing on heavy refurbishment.

As previously explained, heavy refurbishments are more complex projects, typically defined as those involving structural changes to a property that require planning permission or building regulations. Common examples of heavy refurbishment include barn conversions, creating multiple units from a single building or merging multiple units to a single building.

A heavy refurbishment could also include converting a property from commercial to residential, using permitted development rights (PDR). These are automatic grants of planning permission that allow certain building works and changes of use to be carried out on a property without having to make a full planning application.

Permitted development rights

Permitted development rights (PDR) were initially introduced in 2015, and the rules were revised in 2021 to encourage the building of more homes in areas with disused commercial property, such as high streets for example.

Whereas the original PDR granted a right to convert offices to residential, these new rules enable the easier conversion of other buildings, such as shops, restaurants, professional services, surgeries, nurseries and other high street uses – opening up a whole range of new opportunities for investors who want to convert and refurbish property either to let out or sell for profit.

Investors may need approval to demonstrate to the local planning authority that the proposal will not have a negative impact on transport and highways, noise, or natural light, but whereas applying for planning permission can be an uncertain process, PDR provides a right to development given by central government as long as the predefined criteria are met.

Conversion to HMOs and MUFBs

Heavy refurbishment loans can also be used to convert large single-dwelling properties into multiple dwellings, such as a house of multiple occupation (HMO) or a multi-unit freehold block (MUFB), as this can present an opportunity to further increase returns.

An HMO is a building comprised of multiple occupants who share one or more basic amenities, such as toilet, bathroom and kitchen. A typical HMO, for example, might be a student house that is let to a number of different students.

An MUFB, on the other hand, is a property where there is more than one self-contained unit on a single title. Unlike an HMO, a multi-unit freehold block contains separate, independent residential units, each with their own AST agreement.

Bridging finance for heavy refurbishment

When it comes to property refurbishment, bridging finance can be used to fund both the purchase and any of the work that is required.

At Castle Trust Bank, for example, our heavy refurbishment product can be used where planning permission is necessary, although not on ground-up developments – which is where it differs to development finance. It could, however, be appropriate for financing conversions, such as house to flats or flats to house, commercial to residential projects, or HMO conversions. It’s available up to 80% LTV with a range of 9 to 18-month terms and rolled-up interest, with fees and interest able to be added to the loan above the maximum LTVs.

One recent innovation in heavy refurbishment loans, which is more similar to development finance, was the launch of our heavy refurbishments with drawdowns product.

Large heavy refurbishment projects often take significant time to complete, with different contractors required to complete the scheme and payments spread over the duration of the renovation. This means that investors don’t necessarily need all of the funds upfront and can reduce their overall cost of borrowing by only drawing down the funds as and when they need them. With our heavy refurbishments with drawdowns product, borrowers only pay interest on the total balance of the loan they have drawn down. This means they are not wasting money by holding borrowed money but can instead stagger their borrowing for when they have costs to fund.

Case Study: Heavy refurb in action

Here’s an example of how investors could use a heavy refurbishment bridging loan to provide additional housing and also increase their returns.

We worked with clients who were two married investors, a British national and a foreign national, with properties in the UK, Japan and Malaysia. They were looking to purchase a three-bed terraced house valued at £300,000 and convert it into a six-bed HMO.

The clients intended to use their own funds for the HMO conversion, as well as completing a loft conversion, a refit and refurbishment – all of which fell under permitted development.

The planned works would significantly increase the value of the property and so the clients were looking for a short-term loan where they only needed to contribute 20% towards the purchase, freeing up funds to complete the works, before moving on to a term loan when the refurbishments were completed.

We provided an 80% gross day one refurbishment bridging loan of £240,000 on an interest roll up basis. The client had 9 months of interest roll up available, without any payments, to allow for any over runs and also time for letting or sale of the property.

The works were completed quickly and after 3 months, the client opted to switch without an ERC to one of our longer-term buy-to-let loans. This enabled the client to replenish the cash they spent on the refurbishment, facilitating their next purchase.