Everything you need to know about unmortgageable property finance from the ground up, helping you understand development finance.
Successful property developers work hard to find the best deals, and in the extremely competitive world of development it’s often a hard task to find opportunities for making a profit. As with any business, the most successful developers are those who buy low and sell high, but in many cases it can be difficult to obtain finance for properties with potential; a building that is in disrepair might be a great opportunity for refurbishment, but few mortgage providers will be willing to approve a loan for its purchase.
In order to take advantage of these opportunities, developers must turn to specialist lenders who provide unmortgageable property finance. This is a form of bridging finance that is specifically designed to meet the needs of developers who intend to renovate a property, whether it needs extensive work or simply a few internal modifications. Loans are available in many different forms and sizes, depending on the lender, and the fee structure can be altered to meet the needs of each individual borrower.
Though unmortgageable property finance is a highly flexible and powerful tool for developers, it’s important to thoroughly understand the ways in which it works before proceeding with an application. This article deals with some of the main points of unmortgageable property finance, but aspiring developers should be sure to consult their lender or broker before making an application.
Mortgage providers have a very rigid approach to the loans the approve, and their criteria is based upon their ability to sell the property on the open market. A building which cannot be lived in or requires expensive investment is hard to sell, which is what makes most mortgage providers turn away from these types of building. This can be for a variety of reasons, but is most commonly due to the property falling into disrepair.
To the layman, it might appear as though an unmortgageable property is a poor prospect for development. In many cases, a property will be unmortgageable because it’s unfit for habitation and in need of renovation. However, a specialist property developer with experience in refurbishing a property can take a building that’s uninhabitable and completely remodel it, turning a derelict structure into a glittering block of flats worth a fortune.
Unmortgageable property finance is a form of bridging loan, a flexible and adaptive type of finance that can be used for many purposes. In the case of lending for unmortgageable properties, a borrower will usually take out a loan for the purposes of purchasing the property and of restoring it. Once this is complete, the property will either be sold for a profit or a mortgage will be arranged. Usually, a developer will attempt to complete this process as quickly as possible, as a bridging loan is comparatively expensive to service - interest is charged monthly, rather than annually, so fees can quickly add up. However, most bridging lenders provide flexible payment structures that enable borrowers to service interest as they go or to “roll up” their payments until the loan is repaid.
One of the attractions of bridging finance is the flexibility which it offers, as lenders are comparatively free to choose their own terms and conditions. This means that unlike high street lenders, bridging lenders can take a borrower’s existing portfolio into account when considering their loan application, allowing them to leverage existing assets. Unmortgageable property loans are secured against the borrower’s assets, and are usually taken out against the property being refurbished. This means that if the borrower should fail to repay the loan, the lender will be able to recoup their initial investment through the sale of the property.
The most common reason for taking out an unmortgageable property loan is to bring the property into a habitable condition. However, every property is different, and there are varying degrees of work which need carrying out. The many bridging lenders who offer unmortgageable property finance are able to cater for many different needs, and can provide loans to match projects of all different sizes. The purposes listed below are some of the most popular reasons why developers take out these types of loans.
Refurbishment is generally superficial, and is concerned mostly with restoring the appearance of a property. This can cover plastering, painting, furnishings, internal fixtures and fittings, as well as many other types of work, but is mostly confined to decorative purposes. Depending on the property, refurbishment may not be particularly costly, but for luxury apartments and extensive work refurbishment loans may be quite large.
A property in need of renovation often requires extensive structural work such as remodelling or extensions, and renovation finance will cover the costs of rebuilding and reworking the property. Renovation may be used on property in any condition, and some renovations can be extremely far-reaching; turning a decrepit warehouse into an office, for instance. Because of this, renovation loans can often reach 8 figures, and may last for longer than 12 months.
Sometimes the best thing to do with a building is to knock it down and build another one. However, the house must still be purchased ahead of time, and since no mortgage provider will touch it a bridging loan should be sought instead. Loans for demolition will usually cover the cost of the entire project, including initial purchase, the demolition itself and the construction of a new building in its place.
Renewing a property’s lease becomes extremely expensive when it falls below 80 years, and many mortgage providers refuse to approve mortgages on a property with fewer than 60 years on the lease. Therefore, a buyer must make use of unmortgageable property finance in order to secure the property and renew the lease. Lease extensions can cost upwards of 10% of a property’s value, depending on how long is left, so a short lease purchase loan can be fairly large.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
By assessing how extensive the project is, how long it is likely to take and how much it is likely to cost in a worst and indeed a best-case scenario. Refurbishment bridging loans will cover a majority of light and heavy refurbishment projects but for more extensive development projects including ground-up builds of one or indeed multiple units, development finance can potentially cover both the land purchase and build costs
Loans generally range from £25,000 to many millions depending on the size and complexity of the planned development. The amount that can be borrowed depends on the strength of the development proposition, the location, the potential profits, the perceived risks and of course ultimately on the lenders risk appetite.
Yes. Rates are generally a little higher for development finance which reflects the greater complexity and slightly higher risk associated with this form of lending.
This is unlikely. Funding can usually be secured which incurs no exit fees.