What is a Renovation Construction Loan?
Renovation construction loans have been designed to help property investors and landlords to achieve their dream of upgrading a mixed use or existing residential property before selling it or putting it up for rent. Renovation construction loans can be considered to be a type of bridging loan which can be used to finance a wide range of refurbishment projects which are undertaken by property owners.
Why Alternative Finance To Fund Construction Projects?
Traditional lenders are known to impose tight restrictions on borrowers which can give rise to a number of problems and this forces them to seek out alternative sources of finance. If you are planning to refurbish a property before putting it up for rent or selling it, and wish to avoid the lengthy application process followed by traditional lenders, alternative finance may be the right choice for you. Besides making it easier for you to secure a loan, providers of alternative finance are known to have a flexible and relaxed criteria when it comes to evaluating whether you are eligible for construction finance or not.
What Is A Renovation Construction Loan?
A renovation construction loan is a type of bridging loan which has been designed specifically to ‘bridge’ the gap between an existing funds reserve and construction costs. A renovation construction loan has the ability to provide a significant amount of finance in a small amount of time, making it an attractive option for those looking to finance construction projects.
Types of Renovation Construction Loan
The scale of the refurbishment project undertaken by a developer is classified into two categories which are light refurbishment and heavy refurbishment. Most renovation construction loan providers offer one of these types of loans and the type of loan that you will be approved for depends on the purpose of the loan and also your personal circumstances.
Light Refurbishment Loan
A light refurbishment construction loan is generally suitable for smaller projects. However, many developers are uncertain about the scale of their project and may need further information to understand whether their project is a light refurbishment project or not.
Is Planning Permission Required?
Sharing your project details with the property’s local council will help you to find out whether planning permission is required for your project or not. It is a sure-fire way to understand which category your project will be classified into by a renovation construction loan provider. If planning permission is not required, you will be eligible for a light refurbishment loan.
Building Regulations Are Not Applicable
A developer will qualify for a light refurbishment loan only when building regulations are not applicable. Generally, building regulations do not apply to smaller renovation tasks in a property such as:
- Replacements, repairs and maintenance work (except oil tanks, heating systems, glazing units and fuse boxes)
- Changes to existing circuits, or new power and lighting points (except around showers and baths)
- Replacement of toilets, sinks, basins and baths.
More information about building regulations and whether they are applicable to your project or not can be found on the UK government website.
Will the Nature of the Premises Remain the Same?
If your refurbishment project involves making big changes to the property which will eventually change the nature of the premises, then a light refurbishment loan would not be appropriate for your project. For instance, if the purpose of refurbishing your property is to make it better suited for commercial businesses, then you may not qualify for a light refurbishment project.
Heavy Refurbishment Loan
You will need a heavy refurbishment bridge loan if your project doesn’t fit into the light refurbishment category. Such loans are suitable for projects which involve making structural changes to the property when it is expected that the project may cost over 15 percent of the property’s value.
Benefits Of Renovation Construction Loans
The advantages of utilising a renovation construction loan for refurbishment projects may differ from lender to lender, but the following are some features of property refurbishment finance which you can expect to remain standard regardless of which lender you make a deal with:
Possibly the biggest advantage of using a renovation construction loan is that it can be used for a number of different purposes. These loans can be used to finance refurbishment in the following types of properties:
- Residential property
- Commercial property
- Auction property
- Self-build property
Renovation construction loans are an effective way to gain access to the kind of finance which developers need to fund refurbishment projects. With a renovation construction loan, you can expect to receive somewhere between £50,000 to £25million or even more depending on the lender that you approach for the finance. While the amount of finance that you get approved for depends largely on your project and personal circumstances, a renovation construction loan may be the best way to access the higher end amounts of construction finance.
Flexible Repayment Terms
Construction loans including renovation construction loans are generally used for short term purposes. Most providers of renovation construction loans agree to terms of finance up to 24 months without any hesitation. This may be perfectly suitable for your property renovation project, as it will give you sufficient time to complete the refurbishment project which you have undertaken without entering into a long term loan agreement.
Gives You An Exit Plan
Renovation construction loan providers may expect you to provide a detailed exit plan. Such a plan generally covers how you intend to repay the loan when the term of the finance comes to an end. One such strategy that you can include in your exit plan for loan repayment may be to sell the property or apartments within it and use the proceeds of the sale to repay the loan. Having an exit plan gives both the borrower as well as the lender peace of mind that the loan will definitely be repaid.
As with any other type of finance, interest must be paid on a renovation construction loan. While the interest that must be paid varies depending on the lender and also the amount of loan approved, interest for refurbishment bridge loans generally start at 0.55 percent per month.
As there are major expenses involved in renovating a property, a renovation construction loan may be necessary to finance your refurbishment project. Before making any decisions on which type of loan to take, it is advisable to speak to an independent financial advisor.