How to finance your flip.
The Government has announced firm plans to ban letting fees being passed to those renting a property. A date is yet to be set but it’s expected sooner rather than later.
Developing property used to be the reserve of a small number of property experts. But shows like Homes Under the Hammer have demonstrated to ordinary people that it's often possible to turn a quick profit by renovating tired, older properties and quickly selling them on.
If you’re tempted to have a go, you’ll need to have the money in place. This simple guide explains how to finance each stage of the process.
As with buying any property, you’ll need to find a deposit. Putting down a larger deposit could open up your options when it comes to borrowing, as some lenders specify a minimum deposit, as a percentage of the property's value.
You deposit could come from savings, or you could leverage some of the equity you've built up on another property you own, with what’s known as a ‘second-charge’ loan.
In essence, this piggybacks onto your existing mortgage (the ‘first charge’), but has its own terms and rate. It can be much shorter than your mortgage, if you wish.
For the purchase of the property itself, one borrowing option is a bridging loan. These can be funded within days (rather than taking several weeks, as with a traditional mortgage), so are often used to purchase properties at auction.
The loans typically last up to 12 months, and interest is calculated monthly – and the interest is what you'll repay each month. Or, if you wish, it can be bundled up (with any fees) to be repaid in a lump sum with the original loan, as soon as you’re able.
Either way, the sooner you repay your loan, the less it’ll cost you in total.
You’ll need to have cash available for the renovation works. How much you’ll need will depend, of course, on how much work you’re planning on doing.
A surface renovation of a typically-sized property – updating the floor and wall coverings, and perhaps a new kitchen – can often be achieved for relatively little. If the renovation is more thorough – perhaps involving rewiring, plastering, and updates to the outside space – you may need much more.
If you’ve used all of your cash on your deposit, you could theoretically cover the cost of renovation with unsecured borrowing, such as credit cards. But you should think hard about whether to take on this risk, and how much this will cost you in interest while you’re waiting to sell the property.
Once renovation works are complete, it's understandable if you wanted to remove your investment as soon as you can.
If you’ve taken out a Refurbishment Bridging Loan with us, you can increase your loan to cover the cost of the refurbishments, based on the renovated property’s new market value. This releases your working cash to start another project (or repay additional borrowing, like credit cards if you’ve used them).
And once the property is sold, you’ll need to repay your bridging loan. If you've also taken out a second-charge loan, you could repay that too.
Or, if you're planning another renovation project, you could simply continue making the repayments on your second-charge loan, and use the remaining cash to as a ‘float’. Your individual circumstances will dictate the best course of action, and a financial adviser can point you in the right direction.
Remember: any property used as security may be repossessed if you don't make the repayments.
Find out more about Bridging finance.
Lending decisions are subject to an affordability/creditworthiness assessment.
Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.