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Refurbishment Bridging Loans – How do they work?

Bridging loans are some of the less well-known financial products on the UK market because they only suit fairly specific circumstances, often connected with property development.

What is a Refurbishment Bridging Loan?

Bridge loans or bridging loans are a high value, short-term loan often used for property refurbishments.

They are popular with property developers to fund property purchase and renovation. 

The developer then sells the property to repay the loan, and ideally receives some profit. Alternatively, the owner could mortgage the property as a Buy to Let and rent it out to tenants.

Why choose a refurbishment loan?

Most people buying a property will take out a mortgage, enabling them to pay back the cost of the home over a long period to make the debt manageable.

But if you’re not planning to keep the home long-term, and instead are looking to make improvements and sell it within a year or two, a bridging loan can be more convenient.

This kind of loan is faster to set up and means you can access the funds quickly. It could mean you can buy a property and start work almost immediately (if you have secured any necessary planning permission).

In some situations, properties are not eligible for a mortgage – particularly if they:

  • Have structural problems
  • Are considered derelict
  • Don’t have a working kitchen or bathroom
  • Are valued below £50,000

Sometimes bridging loans can fund the necessary refurbishments to make a building suitable for a mortgage. The mortgage fund then repays the bridge loan.

How is a refurbishment bridge loan different to regular term loans?

Regular term loans and short term finance tend not to reach the same high values as a refurbishment bridge loan, and are generally geared towards more everyday borrowing, for smaller scale home improvements or purchases.

Refurbishment bridge loans are specifically set up to support property renovations – they are a form of refurbishment finance.

As part of the borrowing process you may also be asked to define your planned renovations as light refurbishment or heavy refurbishment:

Light refurbishment is where changes will generally improve the look of the property, for example redecorating, replacing flooring, ceilings and fixtures and fittings.

Heavy refurbishment means structural changes, including demolition, extension, new pipework and electrics, followed by light refurbishment.

Are there any disadvantages to a Bridging Loan?

The high interest rates of a Bridging Loan can be a disadvantage, particularly if you will need the loan in place for longer than a few weeks or month.

Refurbishment bridging loans carry substantial risk. If your renovation costs increase unexpectedly, you could end up in a situation where you don’t have sufficient funds to repay the loan. 

You might be able to secure alternative finance, but overall you could end up making a loss on the renovation project.

Some bridging finance lenders will require you to have more than one property as security for the loan. If you are unable to repay the loan your home may be repossessed.

Are there any alternatives to a bridging loan for refurbishment?

Bridging loans for refurbishment are certainly a popular choice for property developers. But you may be able to secure other kinds of development finance, particularly if you are a landlord or operate as a limited company. Commercial finance might be an option in this situation.

How can The Mortgage Store help?

The team at the Mortgage Store has decades of experience in property, and contacts who can help you at every stage of your property journey, so contact us today for advice on your next step.

Although The Mortgage Store doesn’t offer bridging loans, we can direct you to a third party, recommended by us, who will be able to help you.