The Client
We recently assisted a first-time landlord client in purchasing a standard three-bed Victorian terrace. Their goal was to turn the property into a six-bed HMO by extending to the rear and converting the loft space.
The client only had enough funds to cover the initial deposit, stamp duty, fees, and the first tranche for phase one of the works.
The Property
Since the property was to be heavily refurbished and developed, obtaining a traditional mortgage for this kind of project simply is not possible. Typically, lenders will only lend against the property as it stands, meaning the client would not be able to fund the conversion works. With such significant works involved, lenders would also have major concerns about their security, the likelihood of the works completing, and the property’s future value.
This is where a bridging loan works perfectly and really adds value.
Most bridging lenders can lend up to 70-75% net of fees to help buy the property, based on its current value pre-conversion. On top of this, they can also lend a further sum to help complete the major building works, typically up to 70% of the Gross Development Value, or GDV – the value of the property once the works are complete.
In this client’s particular scenario, the property was purchased for £345,000. After the works were completed, it was worth £650,000.
Note – 100% LTV for bridging finance is available if you have additional security in the background.
Adding further difficulty, the client had never completed a development or refurbishment project before, nor had any building or landlord experience. Most bridging finance lenders would normally expect some exposure in this type of environment.
The Solution
Despite the limitations, we secured the client a competitive deal that allowed them to complete the transaction and finish all the works needed.
That was not the end of the story, though. Like any form of finance, bridging loans need to be paid back, usually within 12 months. There are typically two repayment strategies for bridging finance:
- Sale of the asset, or
- Refinance the loan onto a traditional term mortgage
In this client’s scenario, the exit plan was to refinance, since they wanted to benefit from the rental income.
This posed another problem, since the client was a first-time landlord who had never let a property before. On top of this, the tenancy was to be an HMO, and the property was to be owned and let through a limited company.
Most buy-to-let lenders will not lend to applicants arranging an HMO who have never had landlord experience before, since they consider this type of buy-to-let highly specialist and high risk. However, this was not an issue for us – we were able to source a competitive HMO mortgage deal for the client, enabling them to pay off the bridging loan within its term and achieve their HMO landlord ambitions.
Frequently Asked Questions
Can I get a bridging loan for a heavy HMO refurbishment?
Yes, most bridging lenders will lend against both the purchase price and the cost of the works.
Lending is typically based on a combination of the current value pre-conversion and up to around 70% of the Gross Development Value once the works are complete.
What is Gross Development Value (GDV)?
GDV is the value of a property once planned works have been fully completed, rather than its current value.
Bridging lenders often use GDV to determine how much can be lent toward the cost of refurbishment or conversion works.
Can a first-time landlord get an HMO mortgage?
It is more difficult, since most buy-to-let lenders require prior landlord experience for HMO lending specifically.
It is not impossible, though the pool of lenders willing to consider a first-time landlord applying directly for an HMO is significantly smaller.
Can I refinance a bridging loan onto an HMO mortgage once refurbishment works are complete?
Yes, this is one of the two standard exit routes for a bridging loan, alongside selling the property.
Refinancing onto an HMO mortgage allows the client to repay the bridge and then benefit from the ongoing rental income instead.
Commercial Finance Network is a whole-of-market FCA authorised commercial finance broker working with property investors, developers, and businesses across the UK and internationally. We work across the full specialist bridging and HMO panel and will tell you which lenders will engage with your deal, what LTV and rate to expect, and how to structure the application before anything is submitted.
Commercial Finance Network is directly authorised and regulated by the Financial Conduct Authority. Your property may be repossessed if you do not keep up repayments on a loan secured against it. Buy-to-let and business-purpose lending secured against investment property is not regulated by the Financial Conduct Authority.
Call us on +44 1494 622 111 or email info@cfnuk.com to speak to a specialist directly.
Related Pages
- Bridging Loans – fast, flexible funding secured against property
- HMO Finance – specialist mortgage solutions for multi-let properties
- Bridging Loans for Refurbishment Projects – where refurbishment bridging finance commonly goes wrong
- Bridging Loan Calculator – estimate monthly interest and total borrowing costs