How it works
- Buy a property below what it will be worth once improved, often one that a normal mortgage lender would not lend on yet, or one that has been neglected.
- Refurbish it to add value: a new kitchen and bathroom, rewiring, heating, layout changes.
- Refinance onto a buy to let mortgage based on the new, higher value, which repays the purchase finance and releases some or all of your own cash.
- Rent it out, so the rent covers the new mortgage and costs.
The released cash then goes into the next property. Some people add a final R for repeat.
The number that matters: done-up value
Everything hangs on the done-up value, the figure a lender's surveyor will put on the property once the work is finished. It comes from recently sold, finished properties nearby, not from asking prices and not from what you spent.
If the refinance lends 75% of the done-up value, then to get all your money out the total of the purchase price, stamp duty, refurbishment, fees and finance costs must come in at or below that 75%. The maximum offer calculator works that backwards to the highest price you can pay.
A worked example
A house will be worth £200,000 once refurbished. At 75% loan to value, the refinance raises £150,000. The work costs £25,000, legal, broker and other costs come to £6,000, and six months of borrowed money at 9% a year adds about £6,000. With the 5% additional property stamp duty, the most you can offer and still take everything out is about £107,650.
Pay £115,000 instead and roughly £8,000 of your money stays in the property. That is not necessarily a bad deal. If the property makes £2,100 a year after the refinance, £8,000 left in is still returning about 26% a year on that cash.
How it is funded
The purchase is usually funded with cash, a bridging loan or a refurbishment loan, because a standard buy to let mortgage may not lend on a property that needs major work, and because the refinance is easier if the property was bought without a mortgage on it.
Bridging finance is quick but expensive, charged monthly, often with arrangement and exit fees. Every month the project overruns adds cost, which is why the timeline matters as much as the budget.
The six month question
Many buy to let lenders will not refinance on a new value until you have owned the property for six months, and some base the loan on the lower of the purchase price and the valuation before then. A smaller number of lenders will refinance sooner. Check this with a broker before you buy, because it decides how long the bridging finance runs.
Where it goes wrong
- The valuation comes in low. If the surveyor values at £185,000 instead of £200,000, the refinance raises £11,250 less and that cash stays in.
- The works overrun. Older properties hide problems: damp, wiring, structural issues. Build a contingency of 10% to 20% into the refurbishment budget.
- The timeline slips. Contractors, building control and lender delays all add months of finance cost.
- The rent does not support the loan. Lenders also cap the loan by rental cover. If the rent is too low the refinance is smaller than 75% of the value.
- Rates are higher at the refinance. A deal that worked at 4% may not at 6%. Test it with the stress test calculator.
Before you start
Get quotes, not estimates, for the main works. Confirm the refinance lender's rules with a broker. Check comparables for the done-up value with local agents. And decide in advance the most money you are prepared to leave in if the valuation disappoints.