When it comes to bridging, the maximum LTV offered by a lender is not always what it seems. If your clients are looking for maximum leverage, applying to the wrong lender could leave them coming up short.
This is because of the different ways lenders take in calculating the loan amount. While some will use a Net loan amount for calculating their maximum LTV, others will use a Gross value, and this could make a big difference to the loan size your client is able to achieve.
The Net value of a bridging loan is the capital that is borrowed before any additional costs are added, including the arrangement fee and any interest that isn’t serviced. While the Gross value of a bridging loan is the total amount that is owed at the end of the term of the loan, including additional costs such as arrangement fee and interest.
Whether a loan is calculated as a Net amount or Gross amount becomes most important when it comes to quoting a maximum LTV to which a lender can lend. Some lenders use the Net value of a bridging loan, while others use the Gross loan amount, and this means that, at the outset, it can look like some lenders are prepared to lend to higher LTVs than they actually are.
At Castle Trust Bank, we have recently revamped our Bridging range, with a number of new enhancements including the ability for fees and interest to be added to the loan above the maximum Net LTVs on our Light Refurb and Heavy Refurb Bridge products. This means that fees and interest can be added to the loan above the maximum LTVs.
Here are a couple of examples that demonstrate the different loan sizes that could be achieved depending on whether a bridging lender uses Net or Gross.
Example 1
A 5-bed HMO in West London with 2 studio flats attached. It was a Limited Company purchase for £700k on an 18-month heavy refurb bridge at 0.95%/month.
Subject to planning being approved, the plan is to renovate the house completely, add a new bathroom and apply for an HMO licence. The works were estimated to cost £100k, with the resulting value of the property increasing to £1m.
At Castle Trust Bank, we were able to offer a day one 80% Net loan of £560k.
With the same term and rate, the day one loan at 80% Gross would have been just £461k – a difference of more than £98k.
Example 2
A client wanted to buy 2 flats, with a purchase price £600k on a 12-month heavy refurb bridge at 0.95%/month.
The client planned to spend £50k to redesign the floorplan and increase the number of bedrooms in the flats. After this work, the estimated value of the property was £900k.
At Castle Trust Bank, we were able to offer a day one 80% Net loan of £480k.
With the same term and rate, the day one loan at 80% Gross would have been just under £419k – a difference of more than £61k.
Net and Gross loan calculations can make a big difference to how much a client can borrow, so if your investor clients are looking to maximise their leverage, think about how you can net a larger bridging loan.