The loan to value (LTV) ratio of your bridging loan works in much the same manner as that of a traditional residential or commercial mortgage; you forward a proportion of the cash up-front, and the bridging lender lends you the rest. For instance, a 70% LTV loan on a £200,000 buy to let property would require a 30% deposit of £60,000.
An alternative way to raise the deposit would be to offer additional security; for instance, the equity in another property or properties. It is possible to secure a 100% LTV loan in this manner.
An example: Let’s say you have a commercial property worth £1.5 million and an outstanding commercial mortgage of £600,000 on the property. With a first charge commercial bridging loan at 50% LTV, you could borrow up to £150,000 against the property without having to put down a cash deposit:
- 50% of £1.5 million – £750,000
- Existing first charge mortgage to be repaid – £600,000
- Remaining loan amount – £150,000
Alternatively, you could borrow on a second charge basis without repaying the first charge mortgage. The maximum LTV across more than one mortgage or loan is 65%, meaning that you you could borrow up to £375,000:
- 65% of £1.5 million – £975,000
- Existing first charge mortgage to remain in place – £600,000
- Remaining loan amount – £375,000
This arrangement might be beneficial if you are locked into your first mortgage and will incur charges or higher rates by repaying it early. However, the interest rates on a second charge loan would likely be far higher.
Borrowing a bridging loan at market value or restricted market value
It may also be possible to borrow more than the maximum LTV without the need for additional security if the bridging lender bases their underwriting on a valuation other than the purchase cost. This would be either a restricted or unrestricted ‘market value’.
The market value, also called the ‘open market value’ or ‘fair value’, refers to the best price one can realistically expect from an ‘arms-length transaction’ (wherein the buyer and seller are independent and unrelated). There are no restrictions or barriers to entry; it is assumed that sufficient time will have been given to market the property and achieve maximum interest and that both parties will be willing and acting without compulsion. Open market valuations are an inexact science, but will typically be higher than the purchase value.
Surveyors can also provide market valuations restricted to a 90- or 180-day marketing period. These valuations assume similar transaction conditions, but apply shorter hypothetical time frames in which to market the property and complete the resale.
As you might gather, the difference between 90- and 180-day values can be substantial (though less so in a ‘seller’s market’, into which there is every indication parts of the UK are entering). It is important to know which value – purchase, market, 180-day or 90-day – your lender prefers to work to, and also to bear in mind that even a bridging lender who traditionally uses the 180-day value may refuse to fund a deal if the 90-day value is too low. It is advisable to ask your adviser what 90-day value is needed, if any, and attempt to stick to it.
For help searching the market for the best bridging loan for your circumstances and for expert advice with your investment, call us on the telephone numbers above or complete a bridging loan enquiry.