A Heavy Refurbishment Funding Example Explained

Guidance from Daniel Hart, regulated property finance adviser at Your Financial Assurance.

A heavy refurbishment funding example is most useful when it shows the uncomfortable numbers as well as the appealing ones: cash needed at completion, interest during the works, valuation risk and whether the refinance will genuinely repay the bridge. A property may look like a clear profit opportunity on paper, but lenders will assess the route from purchase to exit just as closely as the finished value.

Consider an investor buying a vacant, uninhabitable terraced house for £250,000. It has no working kitchen or bathroom, requires full rewiring, replumbing, a new roof covering and structural alterations to create a better layout. The proposed works cost £100,000 and are expected to take six to eight months. Once complete, the anticipated market value is £475,000.

This is not a light refurbishment case. A standard buy-to-let mortgage is unlikely to work at purchase because the property is not immediately lettable or mortgageable. The investor needs a heavy refurbishment bridging facility that can complete quickly, release money for works in stages and be repaid by a buy-to-let refinance or sale.

Heavy refurbishment funding example: the purchase and works

The total project cost is more than the purchase price and builder’s quote. In this example, the investor budgets £250,000 for acquisition, £100,000 for works and £15,000 for stamp duty, valuation, legal fees, insurance and contingency. The all-in requirement is therefore £365,000.

A specialist lender may offer a £287,500 facility. This comprises £187,500 available on day one, equal to 75% loan-to-value (LTV) against the £250,000 purchase price, plus a £100,000 works facility released in staged drawdowns. The gross facility is around 60.5% of the projected gross development value (GDV) of £475,000.

LTV is the loan expressed as a percentage of current property value. GDV is the expected value once the planned work is complete. In heavy refurbishment finance, lenders commonly look at both. Day-one LTV determines how much can be released to complete the purchase, while the GDV calculation helps the lender decide whether the overall exposure remains sensible once works funding is included.

The investor still needs enough cash to bridge the gap at completion. Here, that is £62,500 towards the purchase price, plus approximately £15,000 for costs. The works money does not usually arrive as a £100,000 lump sum. It is drawn against an agreed schedule after inspections or quantity surveyor monitoring, protecting both borrower and lender from funds being spent before progress is visible.

The cost that changes the deal: interest

Bridging is short-term finance and usually costs more than a mainstream mortgage. The rate, fees and structure depend on the property, borrower experience, works scope, credit profile and exit. The headline monthly rate is only part of the calculation.

Assume interest of 0.90% per month. Interest on the initial £187,500 drawn for nine months would be about £15,188 before compounding. The works facility is not fully utilised from the first day, so its interest depends on when each drawdown is made. If the £100,000 is drawn progressively and is outstanding for an average of four months, interest on that portion is roughly £3,600.

Add a 2% arrangement fee of £5,750, an estimated £3,000 for lender legal and valuation costs, and a possible 1% exit fee of £2,875. The total finance cost could be around £30,000, excluding any additional costs caused by delays. Exact terms vary materially between lenders, which is why modelling the deal before offering is essential.

Interest can be structured in three main ways. Rolled-up interest is added to the loan balance each month and repaid on exit. Retained interest is set aside from the facility at the outset to cover a defined period, meaning the borrower receives less net advance. Serviced interest is paid monthly from the borrower’s income or available cash. Rolled-up or retained interest can help cash flow during an intensive build, but it increases the repayment figure that the exit must clear.

A bridging finance calculator can be useful for testing rates, fees, term length and LTV, but it should be treated as an initial guide rather than a lending decision. In a heavy works case, the timing of drawdowns often matters more than a simple loan amount calculation suggests.

Does the refinance provide a credible exit?

The proposed exit is a buy-to-let mortgage after the house is finished, valued and let. At 75% of the expected £475,000 value, the theoretical maximum refinance is £356,250. If the bridge repayment is approximately £317,000 after interest and fees, there appears to be around £39,000 of headroom before refinance costs.

That headroom is useful, but it is not a guarantee. The new lender will assess the completed property valuation, rental income, the investor’s wider portfolio and personal affordability where required. If the valuer reaches £440,000 rather than £475,000, 75% LTV produces £330,000. The exit may still work, but the margin becomes narrow once mortgage fees and legal costs are included.

This is why a refinance exit should not be based solely on a nearby property sold at a premium. The rent also needs to support the new mortgage under the lender’s rental stress test. For an HMO conversion, licensing, planning position, room sizes, fire safety and local authority requirements can all affect both value and mortgage options.

What underwriters will want before releasing funds

A lender is not just funding bricks, paint and labour. They are funding a plan. The application should include a clear schedule of works, itemised costings, evidence of the investor’s experience or professional team, planning and building regulation information where relevant, and an explanation of the exit.

Underwriters will also examine title issues, structural reports, contractor credentials, insurance, comparable evidence and any existing finance. If the borrower owns the property already and has a first-charge mortgage, a new facility may need to sit behind it as a second charge. This requires consent from the first-charge lender and is not always available. A second charge can preserve a favourable first mortgage rate and avoid early repayment charges (ERCs), but it adds another secured debt and must be affordable.

From our experience arranging these cases, projects most often stall because the borrower has allowed for the builder’s quote but not professional fees, contingency, finance costs and time. Another common issue is a vague refinance plan: the applicant expects a strong valuation but has not checked achievable rent or whether the finished property meets the intended mortgage lender’s criteria. Underwriters do not expect every project to be risk-free. They do expect a realistic plan for the risks that are visible at the outset.

How to make the finance structure work harder

The right facility depends on the property and exit, not simply the largest advertised LTV. A lower day-one advance with stronger GDV headroom may be safer than stretching the loan and leaving no room for a lower valuation or two-month delay.

Before committing, test the numbers against a higher works cost, a longer build period and a lower end value. If the deal only works at the most optimistic assumptions, it is not structured with enough resilience. Your Financial Assurance can compare heavy refurbishment bridging lenders, challenge the proposed exit, coordinate valuation and legal stages, and help manage drawdown requirements from application through to completion.

A well-funded project gives you options when the unexpected happens. Build the exit around conservative figures, keep contingency genuinely available, and treat speed as valuable only when it does not weaken the finance structure.

Risk warning: Lending is subject to status, valuation and lender criteria. Unregulated bridging, buy-to-let and most development finance are not regulated by the Financial Conduct Authority.