Understanding LTV’s in Bridging Finance

Maximising your borrowing potential

A critical factor influencing the amount you can borrow with a bridging loan is the Loan-to-Value Ratio (LTV). A thorough understanding of LTV’s and their impact on your borrowing potential is essential for maximising your financial gains.

Bridging loans are valuable tools for property investors and homeowners seeking temporary funding solutions. Unlike traditional mortgages which have lengthy application processes and stringent requirements, bridging loans provide a faster and more adaptable alternative. Bridging loans are also considerably more flexible than traditional mortgages and can be tailored to your unique situation and requirements.

Understanding the Loan-to-Value ratio (LTV)

The Loan-To-Value ratio is a fundamental metric used by lenders to assess the inherent risk associated with a loan. It represents the percentage of a property’s market value that the lender is willing to finance. The LTV also helps lenders gauge the loan terms offered to the borrower. The calculation involves dividing the loan amount by the appraised value of the property and multiplying by 100. Here’s a breakdown of how it works and how we assess risk.

Risk assessment

Lower Loan-T0-Value Ratio = Lower risk. A lower LTV ratio indicates that the borrower is requesting a loan amount that is a smaller percentage of the property’s value. This translates to a smaller financial burden on the lender if the borrower defaults on the loan. The lender has a higher chance of recouping the remaining loan amount by selling the property.

Higher Loan-to-Value Ratio = Higher risk. A higher LTV ratio signifies that the borrower is requesting a loan amount that is a larger portion of the property’s value. If the borrower defaults, the lender faces a greater risk of not recovering the full loan amount through a property sale.

Impact on loan terms

LTV and interest rates

The Loan-T0-Value ratio can directly influence the interest rate offered by the lender. Lower LTV ratios typically qualify for lower interest rates due to the perceived lower risk. On the other hand, higher LTV ratios often come with higher interest rates to compensate for the increased risk.

Example

A property is valued at £500,000.

Scenario 1: Lower Risk (LTV 50%)

Loan amount: £350,000

LTV ratio: £250,000 / £500,000 = 50%

Potential outcome: The borrower might qualify for a lower interest rate due to the lower risk associated with the loan.

Scenario 2: Higher Risk (LTV 70%)

Loan amount: £350,000

LTV ratio: £350,000 / £500,000 = 70%

Potential outcome: The borrower might be offered a higher interest rate to compensate for the increased risk, or the loan application might be rejected if the lender has a maximum LTV threshold below 70%.

The significance of LTVs in bridging finance

Bridging loans differ significantly from traditional mortgages in several key aspects. Primarily, bridging loans are flexible short-term solutions, typically lasting between 3-24 months. They are used for purposes such as funding the purchase of a new property before selling an existing one or financing renovations. Due to the shorter loan term and inherent risk, bridging lenders typically place significant emphasis on the Loan-T0-Value ratio.

Optimising borrowing power with LTVs

Strategic considerations

Several strategies can be used to improve your Loan-T0-Value ratio and increase your borrowing limit.

Ensuring accurate property valuation

Obtaining a realistic and accurate valuation of the property you intend to use as collateral is crucial. Working with qualified surveyors and appraisers who possess a deep understanding of the local property market ensures the valuation reflects the property’s true market value. A higher valuation directly translates to a lower LTV ratio, potentially allowing you to access a larger loan amount. It’s worth considering engaging with multiple appraisers for a more comprehensive valuation picture. This reduces the risk of an over-inflated valuation that could negatively impact your LTV ratio.

Leveraging equity in existing properties

For borrowers with existing properties, leveraging their equity can significantly impact the LTV ratio. Equity refers to the difference between the market value of your property and any outstanding mortgage balance. By using the equity in a currently owned property as collateral for the bridging loan, you effectively reduce the loan amount relative to the total value of the combined properties. This strategy lowers the LTV ratio and increases your borrowing potential for the bridging loan. It’s important to understand the potential risks associated with using your existing property as collateral.

Reducing loan amount

A straightforward approach to lowering the LTV ratio is by reducing the loan amount you request. This can be achieved by exploring alternative funding sources, such as personal savings or unsecured loans. Alternatively, you could re-evaluate your project budget to identify potential cost-saving measures. Minimising the loan amount directly reduces the ratio relative to the property’s value, therefore, potentially qualifying you for a more favourable loan offer with a lower interest rate. It’s advisable to carefully consider all funding options and prioritise cost-saving measures to ensure the project remains financially viable.

Maintaining a strong credit history

While LTV is a primary factor in bridging loans, lenders will also consider your credit history and overall financial profile. A strong credit score demonstrates responsible financial management and reduces the perceived risk for the lender. This could translate into a slightly higher LTV threshold or more favourable loan terms for borrowers.

We’ve got you covered

Hopefully this article has built upon your understanding of Loan-To-Value Ratio and their importance for borrowing and acquiring bridging finance. If you have any further questions or would like to enquire about our bridging finance options, please let us know. Our friendly, experienced BDMs are on hand to assist. Alternatively, you can call us on 020 8349 5190.