How to Finance a Refurbishment for a Buy-to-Let
When purchasing property for investment purposes, it can make sense to buy a property that needs a lot of work as it will likely be cheaper, and through refurbishment you can make a bigger return on investment.
If you already own rental properties, refurbishment can help to increase rental income, make your property more appealing to tenants and boost the property value.
When looking at how to finance a refurbishment, there are several options to consider including:
· Refinancing property to release equity / increase your borrowing amount
· Refurbishment finance or refurb-to-let finance
· Commercial mortgage
· Buy-to-let mortgage
· Refurbishment bridging loan or bridge-to-let finance
In some cases, it can make most sense to opt for a bridging loan to finance a refurbishment.
Why use a bridging loan for a refurbishment project instead of a buy-to-let mortgage or a commercial mortgage?
When purchasing property, investors want to access the equity as soon as possible and not have it tied up in their assets. For example, if you purchase a property at £150,000 and it is revalued at £275,000 after refurbishment, you’ll want to leverage that increase in value as soon as possible.
However, if you take out a buy-to-let mortgage on the property to cover the costs of purchase and refurbishment, you will be on a fixed term of at least 2 years and so you would have to wait until that 2-year term comes to an end before you can remortgage and release equity from the property.
What’s more, if you wanted to remortgage early you would need to pay an early repayment charge which is usually up to 5% of the outstanding mortgage amount and therefore can be thousands of pounds.
It’s important to note that, if you are planning to purchase a property that needs a lot of refurbishment work before it can be rented out, it is more usually difficult to obtain a buy-to-let mortgage on the property. With this in mind, you may need to consider refurb-to-let finance first, then refinance using a buy-to-let mortgage once the works are complete.
However, if you take out a bridging loan to purchase the property and finance the refurbishment, you will have the flexibility to repay the bridging loan as soon as you are ready and without penalty. Most bridging loans come with a flexible term of 1 to 24 months. This allows you to refinance using a buy-to-let mortgage and then use the equity to invest in another property sooner.
It is usually a lot quicker to arrange bridging finance than it is to secure a buy-to-let mortgage and so if you are in a rush to buy then a bridging loan could be the better option for you.
With so many factors to consider and options to explore, it’s best to speak to a broker who can assess your specific circumstances and recommend how to finance your refurbishment project.
At Sigma Knight we are an independent specialist finance broker with access to multiple high street banks and alternative finance lenders. We provide impartial recommendations that are tailored to your requirements so you can rest assured you’re getting straight-talking and transparent advice.
Best of all - our service is free!
If you’re considering how to finance a refurbishment for a buy-to-let, please don’t hesitate to get in touch.