Refurbishment finance is a short-term loan that can be used to fund a property purchase, as well as any development work that needs doing.

This can include anything from minor cosmetic works through to full-scale renovations, HMO conversions and office-to-residential.

Recent research shows that between Q1 2020 and Q1 2021, 19% of landlords used a short-term credit product to pay for renovations and a further 60% are using their personal funds or investments.

Both options have benefits, but can also limit a borrower’s ability to scale by draining cash reserves until sale or leaving a borrower constrained by credit limits.

A short-term refurbishment loan can give your client the freedom and ability to not only improve their property, but to also enhance the value.

This provides a solution when high-street banks are unable to lend the amounts required in the necessary timeframe and prevents them from having to dip into their own savings.

The application process for refurbishment is designed to deliver loans quickly and efficiently, similar to that of more conventional bridging finance — with the added flexibility of additional funds that can be drawn to support the project.

EPC legislation

After a consultation at the end of 2020, the government announced new standards for England and Wales, expected to become law by 2025.

These proposed regulations would apply to new tenancies first, followed by all tenancies from 2028.

The changes are important to make homes much more energy efficient and reduce carbon emissions, to help the UK reach its net zero target in 2050.

To assist them in the process of making the necessary improvements before the anticipated 2025 deadline, some landlords increasingly want to see the larger property lending sector give incentives, such as favourable financing rates.

Green premium

The standards are only expected to get tougher as the UK strives towards net zero.

There is a real concern that a substantial number of properties across the UK risk becoming ‘unrentable’ or ‘unmortgageable’.

•   What does the specialist finance industry need in 2023 and beyond?
•   Glenhawk launches incentive to boost EPC ratings
•   Demand for bridging finance set to surge to meet April EPC deadline

This is compounded by a rise in interest rates, tax legislation, and demands on landlords to support legislation protecting tenants’ rights.

It is in the interest of lenders to support borrowers by understanding the changing legislation, being creative with products, and continuing to innovate.

It’s now becoming a reality that we all need to play our part in keeping our planet green, clean, and healthy if we want to have a positive future.

A refurbishment loan can help your clients to carry out energy-enhancing improvements and attract more potential tenants.

After all, wouldn’t you rather rent a warm, energy-efficient property with low energy bills over the house next door that hasn’t been refurbished in decades?

Demand is there

Over the past couple of years, we have heard from brokers that increasing numbers of borrowers across the country have been buying properties with the intention of refurbishing them, using bridging products to purchase the property and their own money to execute the renovations.

For years, borrowers have been using reduced bridging finance rates and their own cash reserves for renovations.

While this has many merits, refurbishment loans offer different benefits to typical bridging.

The lending is based off the end value of the asset after the works are done – known as GDV.

This means you can potentially borrow more with a refurbishment loan and only pay interest on funds drawn — safe in the knowledge that funds are available to complete the project.

Octopus Real Estate wanted to address this demand by launching a competitive refurbishment loan product for to help clients improve their properties.

We are also incentivising borrowers with an interest rate discount — because contributing to the improvement of the UK’s energy-inefficient housing stock is of utmost importance to us.

Schemes that achieve an EPC of C or higher and improve the EPC score by a minimum of 20 EPC points, will receive a discount of 0.15% per month on the interest rate on redemption of our refurbishment loan.

This will incentivise retrofitting older homes with newer, greener technologies; provide landlords with immediate access to short-term funding; reduce tenants’ energy costs; and assist with meeting the government’s net zero ambitions.