75% of the purchase, and all of the refurb money: here is what that actually looks like

So here is a worked example. It is the shape of a deal I see all the time, with the numbers changed. No lender named, and no rates quoted, because rates move and the one you get depends on the deal. What I want to show you is what is possible.

The deal

You are buying a four bed house for £475,000. It needs work. Garage into a room, loft conversion, new kitchen, two bathrooms and decorated throughout. Nothing structural, no change of use, no planning needed. In lender language that is a light refurbishment.

Your build budget is £120,000. When it is finished you reckon it is worth £800,000.

That is the deal on a postcard. Now the money.

What you can borrow

Day one you get 75% of the purchase price, net. Then 100% of the refurbishment costs on top, released in stages as the work gets done.

Look at the last two lines. You are owing £476,250 on a house worth £800,000. That is under 60% of the finished value. And most of the work got paid for with the lender’s money, not yours.

Now think about what you would have needed without the build money. £118,750 for the deposit, and then £120,000 of your own cash for the works on top of it. That is the difference this makes.

That word “net” is doing a lot of work

This is where people come unstuck, so it is worth slowing down.

On plenty of bridging deals a 75% loan is not 75% in your hand. The interest for the whole term gets taken off the top before the money leaves. You agree 75% and you turn up at completion with a shortfall. If you want that in full, with a real term sheet line by line, it is all in gross versus net.

Net day one means what it says. 75% of the purchase price lands with your solicitor. Nothing deducted. So you know today what you need to find, and it does not move.

If you have ever had a lender knock the interest off your day one lend, you will know exactly what I mean. It is usually spotted about a week before completion, and that is a horrible week.

The refurb money does not turn up in one lump

Nobody hands you £120,000 on day one and hopes.

You fund a stage of works, the lender sends someone to look, and then you get paid back. Do the next stage, same again. On a light refurbishment the monitoring is usually light touch, so it is one person checking progress rather than a full quantity surveyor’s report every month. On a heavy refurbishment it is a good deal more involved.

Two things follow from that, and both of them catch people out.

You need working capital to float the first stage. And your builder needs to be alright with getting paid in stages, because you are paying him from money that arrives after the work, not before it.

What it costs, and why that decides your exit

Interest on this kind of deal normally rolls up. You are not making monthly payments while the house is a building site with no rent coming in, which is the point.

But it is still a cost, and it gets added to what you owe. I would rather you saw that number early than found it at the end.

For the sake of the maths, say the fees and the rolled up interest come to somewhere around £45,000 over twelve months. Your real figure will be different. It depends on the rate you are offered, the fees, and how quickly you draw the build money down.

So you finish the year owing roughly £521,000 on a house worth £800,000. That is still comfortable. But it is £45,000 that has to come out of the deal, and I have seen people budget as if it does not exist.

The exit is the bit I actually care about

I will say that to anyone who calls me. The rate matters. The exit matters more.

You have got two ways out of this one.

On the second one you now own an £800,000 house with about £40,000 of your own money left in it, and a tenant paying the mortgage. Do those sale sums properly before you start, not after.

Guess what. Most of the developers I work with take the second one.

Where these deals go wrong

I would rather tell you now than on the phone in month nine.

• The works list grows. You find damp, or you decide you may as well do the garden while the skip is there. That money has to come from somewhere, and it is not coming from the facility you already agreed.
• The finished value is a wish. If your £800,000 is based on the one house on the street that sold well in a good month, the valuer will not agree with you, and your exit gets tight.
• There is no working capital. The deal stacks on paper and then stalls because nobody can pay the roofer in week three.
• The work turns out not to be light. Knock a wall about, change the use, add a unit, and you are in a different product with different numbers.

What to do with this

If you have got a project like the one above, the sums are worth doing properly before you offer on anything. What you put in, what gets funded, what it costs and how you get out.

That is a twenty minute conversation and it is free. Ring 0330 133 4442 and we will work through your numbers, not these ones.

This is a worked example, not a quotation or an offer of finance. The figures are illustrative and no lender is named. Loan to values, fees, rates and the availability of staged refurbishment funding vary by lender and by deal, and the terms available to you may be different. Bridging finance is short-term secured borrowing and it can be expensive. If a secured loan is not repaid in line with its terms, the lender may take enforcement action against the property or any other security provided. This is general information, not personalised advice.