A guide to heavy refurb
in association with
A guide to heavy refurb
Welcome to the Bridging & Commercial Magazine supplement, in association with MT Finance
Contents 4 7 13 15
Foreword Interview Case studies Checklist
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A guide to heavy refurb
By Gareth Lewis Commercial director at MT Finance
As demand for UK property remains high and supply low, many borrowers are turning their attention to their existing assets and looking at how potential can be maximised. For those looking to do this, there is often the challenge of getting the necessary funding in place. When time is of the essence—as it so often is—a bridging loan could be the ideal solution here, as it can give borrowers access to funds quickly so they can seize the opportunity.
Whether your client is enlarging an existing property’s footprint to increase living space, or converting a commercial asset to residential, a heavy refurb bridging loan can be a powerful tool for homeowners, landlords and property investors looking to achieve a variety of different goals, including upping the value and maximising space.
While speed is often a key consideration for most borrowers, their reasons for renovating vary. For landlords and investors, the decision is often rooted in commerciality, especially with the current economic uncertainties requiring many to scrutinise their existing properties and portfolios. With inflation continuing to rise, it is vital that landlords not only cover their overheads but have enough margin for error. The best way of achieving this is by ensuring they are getting maximum yield out of any rental property. There are usually multiple ways an investment property can be made more profitable, from light modernisation to more substantial structural works, including extensions and reconfigurations. It is likely that any increase of the square footage will help to secure a higher rental income. A property’s use should also be considered. If a developer has unprofitable or empty commercial spaces, then it could be worth turning these into HMOs. Not only would this help provide some of the much-needed private rental units, but recent changes to permitted development rights has helped to make this process smoother. This means that some projects would not need to seek planning permission, as long as they adhere to the limitations and conditions. The removal of this potential roadblock could speed up the refurb process dramatically, including securing finance.
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A guide to heavy refurb Gareth Lewis
A guide to heavy refurb
“ANOTHER BENEFIT OF A REGULATED BRIDGING LOAN IS THAT IF THE BORROWER DOES HAVE A MORTGAGE, THEN A SECOND CHARGE WILL NOT INTERRUPT THEIR CURRENT RATE. THIS IS A DEFINITE PLUS FOR BORROWERS AMID THE THREAT OF FURTHER INTEREST RATE RISES”
For homeowners, the impetus to renovate is often more personal. With many finding themselves increasingly priced out of the market, updating their current property is a way of creating the living space they want without having to move. While there are options to obtain additional finance via high-street lenders, these processes can often be lengthy and somewhat restrictive. A regulated bridging loan offers much more flexibility while being significantly quicker. It also allows homeowners to unlock equity in their homes to fund these projects, by way of either a first or second charge. This makes regulated bridging loans particularly useful for borrowers who have repaid their mortgage or bought with a good LTV and have enough equity to utilise. Another benefit of a regulated bridging loan is that if the borrower does have a mortgage, then a second charge will not interrupt their current rate. This is a definite plus for borrowers amid the threat of further interest rate rises. The versatility of regulated bridging finance is clearly resonating with homeowners. In fact, Bridging Trends reported in Q1 2022 that it accounted for 43.9% of contributors’ transactions, up from 36% in Q4 2021. I have to say that I’m not surprised by this jump. In the 18 months since our regulated team launched, demand has steadily grown. Thought should also be given to what constitutes a heavy refurb and how this definition can be used to help clients. Here at MT Finance, it is usually categorised by structural works taking place. These include building an extension, a new roof, removal of internal walls, or a full-scale conversion. While criteria are helpful, boundaries can sometimes be blurred on more complex cases. Our ability to take a common-sense approach to every case allows us to deliver tailored solutions for every client. These include facilitating further drawdowns for unregulated cases, allowing customers to borrow more as the works progress. Terms can also be adapted and our lack of ERCs or exit fees allow for total flexibility. Throughout this supplement, we’ll show you how regulated and unregulated heavy refurb bridging loans can help your clients. If you would like to discuss any heavy refurb cases with our team, we can be contacted at enquiries@mt-finance.com or on 020 3051 2331.
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A LITTLE BIT OF R&R MEET OUR UNDERWRITERS
Raphael Benggio, head of regulated underwriting Raph has over nine years of underwriting experience in specialist regulated and unregulated bridging lending. He joined MT Finance in February 2021. Ronnie Woods, head of underwriting Ronnie joined MT Finance in August 2017 after graduating with a first class BA (Hons) History degree from Queen Mary University of London. Ronnie has previous experience working at a wealth management company. Well versed in heavy refurb, Raphael and Ronnie discuss the product from an underwriter’s perspective…
A guide to heavy refurb
IN WHAT CIRCUMSTANCES WOULD A HEAVY REFURB PROJECT NEED A REGULATED OR UNREGULATED BRIDGING LOAN? Raphael Benggio: There are many different circumstances where a heavy refurbishment project could benefit from a regulated bridging loan. A scenario we encounter regularly is where the clients are in the middle of refurbishing their main residence and have either experienced delays due to the aftermath of the pandemic or have had their costs spiral due to labour and supply shortages. In this instance, a regulated bridging loan can be a homeowner’s saviour; we will step in and lend based on the current value of the property in its existing condition and provide the client with the remaining funds they need to get the project completed and the property mortgageable. This will allow them to refinance on to a longer-term, cheaper product. This gives the client both peace of mind the funds are available and the breathing space of the additional time with which to complete. Ronnie Woods: The flexibility of our unregulated heavy refurbishment bridging product means it is both desirable and fit for purpose in a multitude of scenarios, be it a purchase where the client’s ultimate ambition is to obtain planning permission to materially alter an investment property once the acquisition has completed or to grant the client an opportunity to undertake a focused, yet staggered, development of multiple properties held on one title. We can step into the frame swiftly, offering a loan term and availability period of up to 24 months, with clear and transparent thresholds from day one and any further lending that has been agreed at the outset. The latter is made available upon reinspection of the property at times of the client’s choosing, with leverage being made against the current residual site value if planning permission is in place at the time of completion. Where ownership is imminent, we can even assist the client with securing their purchase by lending against the open market value, with any further lending dependent on planning permission being obtained prior to reinspection of the property. Safe in the knowledge that funds are accessible for drawdown across the specified availability 8
period, the client has the benefit of a loan facility with flexibility, should elements of the scheme take longer than anticipated. In the current climate, a heavy refurbishment loan with transparent terms and flexibility, and one that has been underwritten with a clear conception of the client’s end goal, has utmost value and relevancy in the specialist finance market.
THE PERCENTAGE OF REGULATED BRIDGING LOANS IN THE MARKET HAS INCREASED IN Q1 2022—WHY DO YOU THINK THIS IS? RB: I mentioned towards the back end of 2021 that I thought 2022 would be a strong year for the regulated bridging market, so it comes as no surprise that the year has started as expected and regulated loans have increased over Q1. Introducers and borrowers have become more aware and educated on regulated bridging and what it can offer, and this has certainly played its part, but I do believe the larger macro-economic factors are also having an effect. With demand continuing to outstrip supply inflation at almost an almost 40-year-high, and further interest rate rises on the horizon, I think these overall factors at play do generally favour the regulated over the unregulated market, in the short term. I believe homeowners are using regulated bridging to gain an edge by acting as a cash buyer in a very competitive market, allowing them to secure the next purchase while locking in a low interest rate mortgage as an exit. RW: While it is clear from the Q1 data that the regulated market has enjoyed growth, it is not to the detriment of the unregulated sector. We have increased our share of transactions across both, reiterating the relevancy of unregulated bridging finance products which are fit for purpose and in line with consumer demands. For example, purchasing an investment property is still one of the main reasons that borrowers take out bridging loans, according to the Q1 Bridging Trends report. While savvy homeowners and even first-time buyers may be seeking out specialist finance solutions to satisfy their needs as a domestic purchaser, it is difficult to deny that investors and experienced developers are still active in the market and therefore also taking advantage of the competitive housing market
A guide to heavy refurb Ronnie Woods
and the interest rates bridging finance can offer them.
DO YOU EXPECT REGULATED BRIDGING BUSINESS TO CONTINUE RISING? RB: I personally believe regulated bridging will continue to become more mainstream and rise over the course of this year—and the latest data from Bridging Trends seems to agree. In Q4 2021, ‘chain breaks’ constituted around 18% of bridging loan purposes. In Q1 2022, this has surged to 23%. In addition, ‘investment purchases’ are down to 26% in Q1 2022, compared to 29% in Q4 2021. This is obviously just a snapshot over a six-month period, but
I believe it shows a general trend as to where the industry is headed. As the awareness of regulated bridging grows, introducers are now more switched on as to how useful a product it can be. I think this increased awareness—coupled with the economic factors in play now—will continue to contribute to its rise. I believe the overall current state of the market favours regulated lending over unregulated, which may be the reason for the dip in ‘investment purchases’ being noted as the purpose for a bridging loan. RW: The flexibility and availability of auction purchase funding, which has seen a steady rise from Q4, is heavily associated with buyers of investment properties with the aim 9
A guide to heavy refurb Raphael Benggio
of portfolio expansion. Unregulated bridging loans have, and always will be, cohesive with the requirements of many applicants, giving them the benefit of short-term funding for business purposes without needing to exit their first-charge mortgage. As bridging loan volumes increase, I think you’ll continue to see a near-even split in transactions over the coming year.
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HOW DOES YOUR CRITERIA CHANGE BETWEEN LIGHT AND HEAVY REFURB, AND WILL YOU BE LOOKING TO FURTHER ENHANCE THAT THIS YEAR? RB: Our regulated criteria don’t change that much between light and heavy refurb; the pricing may differ, but the fundamental approach to assessing a refurbishment case is broadly similar. We will always look at what works are taking place, costings and timescales, who is doing the refurb and their experience, what necessary permissions are in place, and how the intended exit route fits in etc. The main difference with a heavy refurbishment project is usually the complexity
A guide to heavy refurb and cost of works taking place, which usually consists of some form of structural works. This means that added focus must be given to the schedule provided by the client and who is completing it, as well as ensuring evidence of planning and building regulations compliance. Making sure the valuer who has visited the property gives their opinion and thoughts on the client’s costings and the overall viability of the project is paramount in this situation. The valuers are our eyes and ears on the ground and their opinion is an invaluable tool in assessing any refurbishment project, but especially a riskier heavy one. RW: The main difference in criteria across both our unregulated refurbishment products is the suitability of a multiple drawdown facility for the proposed scheme. What we would typically classify as a light refurbishment loan is where a loan is being taken out to fund works that are usually of a decorative nature. This can also be when a property has otherwise reached the final stages of conversion and/or development, when the residual site value is close to the GDV or has been totally replaced by an OMV. These are provided by way of a single drawdown loan facility and benefit from higher LTV thresholds and competitive rates. On our heavy refurbishment loan proposition, we will look to offer this where material alteration to the structure of the property or change of use is to take place under permitted development or planning permission. In these instances, a client may require 100% of build costs provided over the term but cannot obtain this on day one, due to the current residual site value. The scheme is usually at its earlier stages—for example, being newly weatherproof. Unlike a single drawdown facility, funding will be drawn in stages when the residual site value increases and is structured to fit the client based on their costing projections and timeframes via LTV/LTGDV thresholds that are agreed at the outset. It is important for us to understand the position with planning, any dual purposes for the loan (eg the redemption of charges or the completion of a purchase), and background resources the client plans to utilise so we can ensure the structure of the finance is fit for purpose and allows for the successful completion of the project.
HOW HAVE THE PDR CHANGES ALTERED DEMAND FOR HEAVY REFURB FINANCE? RB: Although the PDR rules as of 31st August 2020 allow you to construct additional storeys to existing residential houses (up to two more to dwelling houses consisting of at least two storeys, and one additional floor to those with one storey), many of the PDR rules apply to commercial or agricultural buildings and the ability to convert these properties into C3 residential usage without formal planning being granted. I always find the majority of commercial-to-residential projects under PD are usually undertaken by experienced developers and investors and fall into the unregulated space. That being said, on the regulated side, we have seen a rise in clients converting disused agricultural barns into their new main residence under PD, as well as numerous borrowers looking to add extensions to their existing homes to give themselves the extra space without needing to move home. RW: Raph is spot on here. We are increasingly witnessing investors and landlords utilise our funding to step into the realm of PD to increase the floor area on properties that were previously used as single dwellings to create multi-let units, such as HMOs, with a view to boosting their rental stream. Some are also using the structural expansion that PD affords as a gateway to obtain planning permission for change of use beyond this, too. Class E-to-C3 conversions under PDR remain a firm favourite for our borrowers. We are continuing to lend on a variety of schemes being undertaken by property owners who are foreseeing the development potential of their existing commercial properties and the benefits of such conversions.
HOW CAN HEAVY REFURB BRIDGING PRODUCTS BE USED TO HELP RETROFIT THE UK’S DRAUGHTY HOMES AND IMPROVE EPCS? RB: Bridging finance could be a very useful tool in the fight against increasing energy prices and used by homeowners to assist with insulating homes and increasing EPCs. Regulated bridging could be used to enhance an EPC of a new home prior to refinance or, similarly, could be utilised to further insulate a house as part of an existing refurbishment. 11
A guide to heavy refurb RW: Since 1st April 2020, private domestic and non-domestic landlords have had to ensure their properties reach at least an ‘E’ rating or have installed improvements that could be funded using available subsidies. The importance of making sure a property, whether let or owner occupied, is energy efficient has become even more prominent due to rising energy and living costs. In turn, this may deter future renters and buyers alike. Our heavy refurbishment offering certainly has relevancy when it comes to conscious development and creating environmentally low impact living spaces via single and multiple drawdown facilities. MT Finance continues to show its commitment to its ESG directives by providing funding against functional, sustainable buildings that are in the process of being developed to be functional while minimising the use of natural resources—and therefore have a low environmental impact, including that on biodiversity. Green buildings are also likely to retain value over a longer term, something that is recognised by our panel valuers and is, in turn, encouraging developers to think consciously at the design stage.
WITH LABOUR SHORTAGES AND RISING MATERIALS AND ENERGY COSTS, WHAT ARE YOU LOOKING AT WHEN UNDERWRITING A HEAVY REFURB DEAL? RB: Taking this into account, especially with regard to rising materials and labour costs, one of the main aspects I look out for on a regulated heavy refurbishment case is ensuring there is adequate contingency in place for the project. Having underwritten development and refurbishment deals for the better part of a decade, one thing that continually rears its head is clients needing additional funds because they underestimated their costings and didn’t have adequate contingencies in place. When you have a heavy refurbishment project with these macro factors at play, it becomes even more prevalent as there are more instances where costs could escalate due to the heavier nature of the works and soaring materials prices. Ensuring a client is prepared for this and has factored in a healthy contingency in their costings of the project is crucial in preventing delay and ensuring a successful outcome for the project. 12
RW: The feasibility of a scheme within the timescales and projected costings as set out in the loan application are always a main area of focus when underwriting a heavy refurbishment loan. If the client has limited resource or experience, it can be useful at underwriting stage to increase the loan term or to factor in a higher level of contingency in the agreed further lending sum to account for any short-term disruption to the project. Due to rising costs and labour shortages, it is also important for a finance provider to understand who is carrying out the proposed works and the nature of any agreement the client may have. For example, what is being subcontracted and have they engaged in a fixed-price contract? The necessary involvement of third parties, such as local authorities, always have the potential to delay the commencement of schemes and the subsequent fulfilment of exit strategies, and so the position with planning permission and any supplementary agreements or liabilities such as CIL and S106 agreements is always useful to know upfront. While we do not engage with monitoring or quantity surveyors, our RICSpanel valuers will be crucial in preparing us with our initial residual report and any updated appendixes throughout the facility. It is therefore important that the schedule of works that map out the client’s intentions as they prepare to progress the scheme are considered at underwriting stage before we instigate that process.
A guide to heavy refurb
CASE STUDIES
REGULATED HEAVY REFURB: COMMERCIAL-TO-RESIDENTIAL CONVERSION
Client circumstances: Our clients had recently purchased a former community hall which they had started to convert into a three-bedroom home for themselves. They had previously renovated a property, which had sold for a substantial profit and had allowed them to utilise the equity for the outright purchase of the community hall and its initial works. Planning permission had been granted and the refurb had already begun but, with their allocated funds for the project running low, a short-term fix was needed to complete the conversion. Outstanding works included, among other things, the installation of a staircase, preparation of some internal wall finishes, the plumbing and electrical second fix, and decoration and snagging throughout. Unable to secure high-street finance due to the property’s change of purpose, and keen to ensure the project schedule was not interrupted, their broker contacted our regulated division straight away. MT Finance solution: Understanding the need to prevent any interruption to the works, we worked quickly to issue a heavy refurb regulated bridging loan of £143,000 at circa 50% of the property’s OMV of £284,500. Interest was retained at 0.75% over a 12-month term. As the works continue, the market value of the property will rise, with the valuer predicting it to have a GDV of £446,000 once the renovation is complete. The benefits: Our regulated heavy refurb bridging loan ensured that the clients had the funds they needed to convert the community hall into their new three-bedroom home without facing any delays. With the property’s value projected to increase by over £160,000 once the works are complete, the clients can look to exit our bridging loan with a high-street mortgage based on their home’s new OMV. If this happens before the end of their 12-month term, they won’t face any ERCs or exit fees by using MT Finance. “The project was ambitious due to the scale of the conversion and the works needed to turn it from a large hall into a three-bedroom home. It was vital that funds could be provided as soon as possible to ensure the works could continue as planned. Teamwork was particularly important, and all those involved really pulled together to get this over the finish line as quickly as possible.” — Raphael Benggio, head of regulated underwriting.
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A guide to heavy refurb
UNREGULATED HEAVY REFURB: COMMERCIAL AUCTION PURCHASE
Client circumstances: Our client is a property development company which was the winning bidder on a former department store valued at £750,000. It initially needed £375,000 to complete the investment purchase with further drawdowns going towards substantial works, which included modernisation of the property, the removal of asbestos, and the building of eight new residential apartments on top of a commercial ground floor. It was scheduled to start after planning permission had been granted. As the property had been purchased via auction, the client needed to secure a short-term fix extremely quickly to ensure it didn’t lose its 10% deposit—or the property. This is when its broker contacted us. MT Finance solution: We issued a heavy refurb further advance capped at a total of £375,000—50% of the property’s value— which equates from each of the valuations that were undertaken prior to the drawdown. Interest was retained at 0.75% over a 12-month term. We also discovered that a portion of the client’s planned renovations were covered by PDR, meaning some works could continue while they awaited additional planning permission. As securing this was a condition for further drawdowns, the fact that not all works needed this dramatically sped up the process for some of the extra tranches. Planning permission for the full project has now been granted, enabling the clients to request up to four further drawdowns as the works progress, which—combined with the first tranche—can total up to £875,000. Each request for further funds will be based on the property’s value at that specific time and is subject to the LTV on total borrowing not exceeding 50%, with a 50% cap on the GDV. As the works continue, the market value will increase, allowing for further borrowing. The benefits: Our bridging loan ensured that the client purchased the investment property before the deadline, securing the purchase and saving its deposit. The works it will undertake will increase the property’s value, as well as make it more attractive to high-street lenders. This will enable the client to refinance our bridging loan with a traditional BTL mortgage based on the property’s higher value. As with all our loans, it won’t face any fees or penalties if they achieve this before the agreed 12-month term. Once the works are complete, the client will have a new multi-unit property in its portfolio, which it expects to generate an estimated £162,000 in rental income per year. “The borrower required a fast-paced option to hit its deadline which, thanks to everyone’s hard work, we were able to hit. The discovery that some of its refurb plans fell under the PDR criteria meant it didn’t need to apply for planning permission for the full project, enabling us to release further tranches to the client quicker. Planning permission has now been granted and the borrower is continuing with the works on the residential units and, in the interim, is looking to secure tenants for the commercial part of the property.” — Lucy Betts, junior underwriter at MT Finance.
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A guide to heavy refurb
CHECKLIST
HOW TO SPEED UP YOUR HEAVY REFURB APPLICATIONS Providing the right information when submitting a heavy refurb application can significantly reduce the amount of time it takes to complete. Here, we’ve provided a handy checklist of key information you may need to provide to ensure your client’s heavy refurb application goes through as quickly and smoothly as possible. Evidence of who is completing the works An explanation or evidence as to who is completing the works is vital. If there is a JCT or fixed-price contract in place, then a copy needs to be provided. If not, then a copy of invoices for sub-contractors should be sent. Alternatively, if the works are being carried out by the client, then the lender needs an overview of their previous experience. Schedule of works As well as listing the proposed works, it also needs to include costings and timescales. Copies of relevant documentation This includes planning permission, building regulations, or warranty documents. Having these in place at the beginning of an application can really help. Any additional sources of funds If the lender isn’t funding the full cost of the works, then an explanation will need to be provided as to how the client has financed the works to date. If there is a shortfall, then evidence of how this will be met will also be needed. Confirmation of the exit route Not only does a lender need to know how the bridging loan will be repaid, but they also need to know whether the exit is dependent on the works being completed. If so, evidence should be provided that the works are achievable within the proposed timeframe. For MT Finance, the above information is certainly useful and, in some instances, vital—but this will be reviewed by an underwriter who will gauge the relevancy of each requirement. 15
