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Works-Funded Loan for Converting a Commercial Property to a Residential Property


In our previous post, we explored Which loans are available for converting a commercial property to a residential property. 

In this post, we are going to explore the works-funded loan for converting a commercial property to a residential property in further detail.

Works-Funded Loan for Turning a Commercial Property into a Residential Explained

Where a property requires work or is due to be converted to a residential property, it will need to be purchased using a bridging loan / short-term development finance.

In this instance, a lender will lend up to a maximum gross loan of 75% loan to value (LTV) on day 1 to purchase the property (up to 100% loan to value can be achieved through the use of additional security).

Alongside lending for the purchase, if you are looking to borrow funds for the works then the good news is, lenders can also look to provide this through a works-funded loan. This facility can fund up to 100% of the costs of work for the project (So long as the total loan to gross development value is less than 75%).

How is a Works-Funded Loan Structured for Converting a Commercial Property to a Residential?

Below is an example of how the loan works: (Mobile users – turn your phone landscape to view the table below).

Purchase Price Build Cost Gross Development Value (GDV)
£500,000 £200,000 £1,000,000

In this example, the client is looking to purchase a property for £500,000 and intends to complete £200,000 of renovation works. The estimated gross development value after the work is £1,000,000.

Gross Day 1 Loan Gross Day 1 Loan to Value Works Funded Facility
£375,000 75% £200,000

The lender is able to lend 75% gross on day 1 to purchase the property while providing a works-funded loan of £200,000.

Interest Rate 10%
2% Arrangement Fee £11,500
Term (months) 10
Number of Drawdowns 10
Total Interest Facility £58,650
Total Facility Including Fess & Interest £645,150
NET Day 1 Loan after solicitor/arrangement fee £362,000

The product selected has an interest rate of 10% fixed for the duration of the loan. The product comes with a 2% arrangement fee deducted from the day one loan.

The 2% arrangement fee is based on the gross day 1 loan + the works-funded facility, which gives a total arrangement fee of £11,500.

Considering the gross day 1 loan + the works-funded facility + the arrangement fee, the total interest payable on the loan will be £58,650. The interest is rolled meaning there are no monthly payments, instead, the interest is repaid upon the exit of the loan. As interest is calculated daily, the interest you pay will depend on when you repay the loan.

The total loan amount, including fees and interest, is £645,150. When compared to the gross development value, this is 64% loan to gross development value.

Upon completion of the loan, the lender will advance your solicitor the NET day one loan used to acquire the property, this means you will require a deposit of £138,000 + stamp duty and legal fees to purchase the property.

How are the Funds Released to Complete the Commercial-to-Residential Conversion?

As mentioned above, on day 1 you will receive your NET day 1 loan, which allows you to acquire the property.

The works-funded loan is then paid in staged payments in arrears, and as such, you will need to use your funds to complete the first stage of the works.

The facility for the works is £200,000, and the build duration is 10 months, so we can calculate monthly drawdown payments of £20,000 each.

Once the first stage of the works is completed, the lender will invite a monitoring surveyor to assess the works that have been completed. As well as physically reviewing the works, the monitoring surveyor will need to see evidence from receipts and invoices to confirm the spending.

Once these works have been reviewed and signed off, you will be sent the funds for the works towards the next stage of the property and the process repeats for another 9 months.

The fees for the site visits will vary depending on the size and complexity of the project. Typically these fees range between £1,000 – £3,500 and are an upfront cost to consider.

When looking at other upfront costs to factor into the cash flow projection, you would need to consider legal costs and stamp duty as these will need to be self-funded.

How Can Advocate Finance Help?

Do you require funding for turning a commercial property into a residential property?

If so, then Advocate Finance are here to help. We are experts in arranging funding solutions for property investors and developers. Thanks to our award-winning knowledge and profound relationship with our 160 lending partners, we are able to assist you in finding the correct funding solution for your commercial-to-residential conversions.

Get in Touch with Us Today

We provide a FREE assessment on all our services.

Please contact us directly for more information, or use the Get in Touch With Us Today feature at the bottom of this page.

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