One of the ways that bridging loans differ to a term mortgage is that some or all of the interest can be repaid upon redemption of the loan, and this means it’s important to consider whether a lender uses net or gross loan amounts to calculate the loan-to-value (LTV).
Understanding how a lender calculates loan amounts at the outset is a critical step in choosing the right lender for your clients. Here’s what you need to know.
The net value of a bridging loan refers to the capital amount borrowed before any additional costs are included, such as arrangement fees or interest that isn’t paid during the loan term but is instead added to the loan balance.
The gross value, on the other hand, represents the total amount owed at the end of the loan term, including all additional costs like arrangement fees and accrued interest. When these costs are added to the original loan amount, it becomes the gross bridging loan amount.
Understanding whether a lender calculates LTV based on the net or gross value is crucial when quoting a maximum LTV. Some lenders use the net value, while others use the gross value. This distinction can make it seem like some lenders offer higher LTVs than they actually do, depending on which calculation they use.
To illustrate how these loan calculations can affect the amount a client may borrow, consider two lenders who both claim to offer loans up to 75% LTV. If one lender sets this limit based on the net value and the other on the gross value, the amount the client can actually receive will differ. Since the gross value includes all additional costs, the total loan amount advanced could be less if these costs push the loan above the maximum LTV threshold.
This scenario complicates comparisons between lenders, as a lender offering a 70% maximum LTV based on the net value might actually provide more funds than a lender offering 75% LTV based on the gross value. It’s important to calculate and compare both options to find the best fit for your client’s needs.
At Castle Trust Bank, we are able to lend up to 80% LTV based on Net loan calculations and this can enable investors the leverage they need to make the most of new opportunities.
If you have any doubts about the best option for your clients, it’s worth picking up the phone and speaking to your BDM, who can help clarify how a lender’s maximum LTVs are applied and what this could mean for your clients.
Anna Lewis is commercial director at Castle Trust Bank
