With lockdown restrictions causing many people to re-evaluate what they look for from their home, a growing number are considering refurbishment and structural renovation. These large-scale projects can give homeowners the opportunity to create their dream property without the requirement of building from the ground up.
While often similar in scope and ambition to self-build, these projects merit different financial solutions. With this in mind, we spoke with Joe Websper, one of Investec’s Business Development Managers, to learn more.
Q) How has coronavirus impacted the number of people wanting to refurbish their homes?
During the last year we’ve seen a surge in the number of enquiries from people looking to conduct property refurbishments.
This is primarily because people are spending far more time at home. Many clients want to make changes that will allow them to set up a dedicated home office, or to maximise their outdoor space – whether that includes landscaping the garden or upgrading the roof terrace.
In addition, for Prime property buyers, Stamp Duty still poses significant expense. As a result, many are choosing to see how they can upgrade their existing space instead of incurring the cost of moving home.
Q) What might a typical project look like?
Typically, the clients we work with are materially changing either the design or the layout of their property – or sometimes both.
Although many choose to renovate their current home, some want to refurbish a new purchase. I recently discussed a case with a client who is purchasing a house that was previously converted into four self-contained units. As part of the refurbishment he is removing the stud partition walls, taking out three of the four kitchens and redesigning the entire layout. Rather than building a completely new house, he is essentially re-designing the property to meet his family’s requirements. Another recent case study is below.
Case study: Purchase and renovation of new family home
The challenge
We recently helped a Broker to find a solution for a professional couple who were looking for a new family home. The pair had found a property that met some of their requirements but wanted to carry out a renovation that included adding an extension, to meet their needs. They wanted to stay in their existing home while the work was completed and therefore needed to purchase the new property before selling their current one.
The ask was for a loan to bridge the gap between sale and purchase of their new home as well as to provide funding to make the property their own. Investec created a solution to provide just that.
The solution
Having worked with our panel valuer and Quantitative Surveyor to understand the intended works, costs and timings we were able to provide a loan in three parts; one against their current home (a re-mortgage), the second against their new home (the purchase) and the third also against their new home but structured to allow flexibility of release of funds in line with the works.
The property was revalued at the end of the works and the clients put their existing home on the market, repaid part one and settled into their homes without the need to refinance now that works were completed.
Lending is normally secured against the property in question, which tends to be the main residence. Occasionally, the cost of a project means that additional security is required, in which case a lender may consider taking further security against a second property – this might be the client’s buy-to-let property, for example – or we may use an investment portfolio as additional security.
Q) Could there be benefits to taking the refurbishment route?
As well being able to create a home to their own specifications, the potential savings for clients can be substantial.
Another advantage of purchasing and renovating, as opposed to building from scratch, is the added bonus of keeping the character and history of the original property as opposed to being a new-build. A lot of clients will modernise and upgrade Victorian or Georgian property to have the best of both worlds.
Q) How do lenders usually approach these kinds of renovation projects?
As lenders, a crucial factor to bear in mind is that the property needs to be worth more than the loan itself. For this reason, lending is structured so that finance is released incrementally over the course of the project, rather than upfront at the beginning. For instance, if a client has taken out a 70% loan-to-value mortgage (LTV) and then gutted that property prior to refurbishment, the property’s value will change as these works are carried out. The lender will therefore work to a phased schedule in order to release money in tranches, in accordance with work being completed and to maintain the loan to value of the investment, or keep within an LTV limit.
Lending is normally secured against the property in question, which tends to be the main residence. Occasionally, the cost of a project means that additional security is required, in which case a lender may consider taking further security against a second property – this might be the client’s buy-to-let property, for example – or may use an investment portfolio as additional security.
Another advantage of purchasing and renovating, as opposed to building from scratch, is the added bonus of keeping the character and history of the original property as opposed to being a new-build. A lot of clients will modernise and upgrade Victorian or Georgian property to have the best of both worlds.
Q) Are there challenges to financing deals like this?
For brokers and lenders there are often a number of factors which make these projects complex.
Firstly, large-scale refurbishments are usually extremely fluid projects. A client will often work through multiple plans before making a final decision – and as designs change, so too will costs.
Secondly, banks must be cautious regarding any amendments to security during a refurbishment. Any potential lender needs to ascertain what the value of the property will be when it is in its worst state of repair, and how that impacts its risk profile.
Lastly, most projects of this nature comprise multiple parties, including architects, builders and designers, as well as the property owners themselves. It’s important to remember the human factor; everyone has an opinion, meaning that the process can take time.
Q) How could Investec approach these projects?
Unlike many banks, which may categorise projects of this nature as ‘self-build,’ Investec recognises that there are unique financial requirements that come with refurbishments.
For this reason, we take a bespoke approach, building a lending solution that takes a holistic view of each client’s wealth and personal circumstances.
The project must add value to the property, it cannot be a complete re-build and nor can the project be for commercial purposes. If you are considering renovating a property for commercial reasons, please speak to a member of our Structured Property Finance team.
