'I've seen a property with potential but don't know how to finance a renovation'
PUBLISHED: 12:02 08 January 2016 | UPDATED: 12:02 08 January 2016
Gary Lederberg of Affirmative Finance explores the financial options for aspiring property developers, from securing a mortgage to using your own funds.
The idea of renovating a promising second property is one which we’ve all contemplated. Whilst there is obvious potential in becoming an amateur property developer or property investor, the first stage of the process – before considering any of the aesthetics – is creating a secure financial plan.
Below are answers to a few frequently asked questions about financing renovations, which should make the process clearer.
I’ve found a property I’d like to renovate, how do I go about getting finance?
If you’re looking to fund the renovation of a second property whilst maintaining your own, there are a number of options, but it will all depend on your financial status and the habitability of the property.
You will normally have to find a specialist lender for a property that is not currently habitable or is to be converted (like a barn for instance). These specialist lenders generally operate in the bridging and short-term sector, providing solutions that are not available from the normal high street lenders. These specialist lenders provide lending on properties that are run down, for instance a property with no bathrooms or kitchen, or are non-standard construction build (with reparation works required).
If you decide to locate a lender yourself it is best to consider a lender which is authorised and regulated by the Financial Conduct Authority. Some bridging and short-term lenders are also Members of the Council of Mortgage Lenders, alongside the main high street lenders and banks.
Alternatively you could seek the assistance of a mortgage broker. A useful way to locate a mortgage broker (in addition to a general Google search) is to search your locality through the register on the website of the Financial Conduct Authority.
How do these loans work?
Advances for these types of loan are generally staggered and released in stages, following various inspections of the property by the lender, which ensure that works are being carried out appropriately. This means that it is advantageous to agree with your builder (before the work commences) to pay in arrears, following satisfactory inspections by your lender’s representative – this is normally done by a valuer or quantity surveyor. Before entering into the loan,be sure to double-check with your lender that you will only be charged interest on monies actually drawn down by you under the loan, as opposed to interest (or non-utilisation fees) being charged on the total amount of your loan facility. This is irrespective of whether or not you actually receive the funds.
Once the renovation is complete, the property can be remortgaged to repay the lender. At this stage it is also possible to release some equity (perhaps to start on the next project). Remember, VAT relief is also available with some property projects.
If it is your intention to claim back VAT, and if you are in any doubt as to whether or not VAT can be reclaimed then be sure to take taxation advice before you start the works, otherwise you may find that your budget simply does not work without the VAT monies coming back to you.
Should I use my own funds for the renovation?
Generally, yes – if you have available funds. Naturally this is likely to be the most cost effective solution. However, consider and reconsider your budget to make sure that you either have all funds in place or the ability to raise funds, prior to the renovation works. Your budget should include a suitable contingency too – all building and renovation works will invariably throw up a job or some work that was not anticipated at the outset- For example, the building inspector may require an element of underpinning for an extension that was initially unforeseen. Remember, fixed price contracts from builders can still allow for variations, and still result in additional cost, during the course of the building and renovation works.
Gary Lederberg is a Director of Affirmative Finance, who offer flexible funding options to help you when you need it most. Affirmative Finance is authorised and regulated by the Financial Conduct Authority.