How to finance renovations – know where to start and where to get help

Renovation work could be a top priority for property investors in 2023. The trends we’ve seen in the market may force many to think about upgrading their portfolios, as opposed to expanding them.

With interest rates and costs rising, attentions may be turned to raising the value of properties already owned. What’s more, we’re one year closer to new EPC rules, while changing working patterns still loom. Many employers are keen to get their staff back into the office. But remote working remains popular with employees.

It will soon be easier for employees to act on these preferences too. New plans from the Government will allow workers to request flexible working from day one of their employment. Properties that have been upgraded to include home offices or studies could prove tempting.

But before you make plans for sprucing up your assets, you’d best be prepared. If you want to understand how to finance renovations, this blog may help you with some of the basics.

Source: The Home Office Life, Gov.UK

How much do home renovations cost?

Renovation costs can vary greatly. What you’ll end up paying will be dependent on your specific circumstances. Generally, the bigger the project, the higher the cost.

You’ll likely end up paying more if your plans involve knocking down walls over installing new doors. Overall, the average cost for renovating a 3-bed house in the UK is £76,900, according to Checkatrade.com.

But, it also advises renovators to add a 10-15% contingency to their budgets for unexpected costs. You could be the most organised property investor in the UK. But, your budget may be stretched by unforeseen circumstances. How to finance renovations could be less of an important question than how to plan for the unexpected.

Source: Checkatrade

Why can plans go overbudget, and are renovations still worth it?

In recent years, homeowners across the UK have seen renovation costs go above their budgets by thousands of pounds. This isn’t a new phenomenon. In nearly 25 years of Channel 4’s Grand Designs, more than 80% of their projects went over budget.

Your renovations may cost more than expected for several reasons which, again, will be specific to you.

1. Unintended miscommunication between you and your hired contractors.
2. Your project may require more labour or materials than initially expected.
3. You may change your mind on what you want and start from scratch.
4. Wider economic factors: few predicted a global pandemic would be on the cards.
5. The influence of the conflict in Europe.
6. Current inflationary pressures not seen since the 1970s.

Nevertheless, these issues led to supply chain pressures and ramped up costs. The National Federation of Builders found material prices changed weekly in late 2022, and were on average, 23.5% higher than they were in 2021. What’s more, the overall cost of financing renovations rose by 61% between January 2021 and 2022, according to Checkatrade.com.

These costs could be especially painful if you’ve added features to your property that actually reduce its value. While you may assume wine cellars or home cinemas would be desirable, analysis from Help me Fix revealed they may devalue a home.

Despite these risks however, if you get your renovation plans right, you could potentially dramatically increase the value of your assets. Loft conversions, added garages, and improved natural lighting could all add 10%-20% to your property value when the time comes to sell, according to GetAgent.

Source: Love Property, House & Garden, Together Money, Daily Mail, GetAgent, The Sun, Metro, Daily Mail

Be clear on what it is you’re planning

If you’re in the early stages of a renovation plan, you’ll need to clearly identify what you’re improving. You may see the words “refurbishment” and “renovation” thrown about somewhat interchangeably. But, there are key differences between the two. If you mix them up, it could prove costly. You’ll want to be clear on whether you’re addressing how to finance renovations, or refurbishments.

Refurbishments generally concern repairs within a property, or the restoration of a building. This can include redecorating a room or the plastering of walls. Renovations on the other hand usually involve more substantial changes.

Properties are often renovated when they’re simply not up to scratch, and need to meet minimum thresholds. Renovations can involve the replacing of entire sections, extensions, or conversions. What you need to know is that renovation work may require planning permission. Whereas small refurbishments will most likely, not.

You’ll want to be cautious when it comes to planning permission. The rules have been eased in recent years but if you fall foul of them, you could be made to apply to planning permission retrospectively.

You may even have to reverse any changes you’ve already made. To help you avoid any costly mistakes, you can access the government’s planning portal online. This free-to-use tool breaks down when you’ll need permission, and how you can apply.

Source: The Sun, Planning Portal

What are the mainstream options and how will they fare in 2023?

You may be able to find some options for your renovation plans on the high-street. You could utilise green home grants or fund them through remortgaging, releasing equity in your home, or increasing an existing mortgage – dependent on what works for your circumstances. Professional advice will be able to help with understanding what the best solution will be for you

There may also be some specialised products available, such as buy-to-renovate mortgages, or green mortgages. But, it could prove difficult to try and hunt down these products. Last year, high-street banks struggled to adapt to the wider economy.

Following the September mini-budget, banks pulled mortgages from the shelves. The market has recovered somewhat since then, but lenders are still tightening their criteria due to rising rates, affordability issues, and the cost-of-living-crisis. High-street banks appear to just be sticking with the most vanilla of cases at the moment, with mortgage approvals plummeting in the final months of 2022.

There may be little appetite for your niche renovation plans. Especially with planning reforms on the horizon. Several consultations and legislative changes to planning laws are on their way this year, courtesy of Levelling Up Secretary Michael Gove. These reforms could completely upend renovation plans. We’ve already seen how banks struggled with uncertainty in 2022. It’s unclear if they’re ready for any more potential roadblocks in 2023.

Source: Compare the Market, Online Mortgage Advisor, Money Saving Expert, Financial Reporter, This is Money, Homebuilding & Renovating

What other options are there for financing renovations?

But, the specialist finance industry will be there to support property investors through these uncertain times. At MFS, we didn’t stop lending during the pandemic. Nor did we slow down following its aftermath. Our flexibility allows us to adapt not only to our clients’ requirements, but also to a changing landscape. As mainstream lenders struggle to keep up with economic challenges, our specialist funding will be there to keep your investment plans afloat.

Property buyers appeared to recognise the importance of the specialist lending sector last year. Bridging completions, applications and loan books all continued to grow in Q3 2022, according to the latest data from the Association of Short Term Lenders (ASTL). Bridging completions topped £1.4bn in Q3, a rise of 15.9% on the previous quarter, and it was the 6^th consecutive quarter where completions reached the £1bn mark.

What’s more, data from Henry Dannell showed that while funding a property investment or supporting a broken chain were among the most common reasons for taking out a bridging loan in Q2, some 13% of loans were taken out for properties in need of significant renovations.

MFS can help you regardless of whether you plan a simple refurb, or a portfolio expansion. We’re also happy to hear from those with poor credit, complicated setups, or even bankruptcies on their record. We’ll be there for you as we collectively look for opportunities in 2023.

Source: Bridging Loan Directory, Buy Association

What specialist financing is available to you?

There could be several financial options available to you. Some will be more obvious than others.

1. You could apply for finance specifically tailored for renovation and refurbishment work. Such as our own permitted & light development loans. These loans can be used for a range of plans, such as cosmetic upgrades, through to extensions.

2. But, there are also other forms of finance which could help with different stages of a project. Auction finance can be used to purchase desolate properties which are then renovated and flipped for a profit.

3. At the other end of the spectrum are developer exit loans. These can support property investors who are nearing the end of a project, and may need a bit of breathing space to get everything wrapped up and buyers found.

4. There is also overseas finance for foreign property investors.

5. Additionaly, 2^nd charge loans are for those who want to utilise an existing asset that already has lending secured on it.

6. Alternatively, you could utilise complex loans if you face complicated structures.

There are multiple answers to the question of how to finance renovations. When it comes to financing renovation plans, you have a lot of options available to you. What’s important, is making sure the option you choose is right for your plans. Renovating a property can be easier said than done, so you’ll want to work with a lender who understands your end goal, and how it ties in with the wider market.