A common misunderstanding concerning bridging loans
Residential or commercial mortgages plus other finance facilities such as secured loans, that all take a charge on property being used as security are all restricted due to loan to value. Commonly residential and commercial mortgage providers will limit their maximum facility for any application according to the valuation of the property being offered as security. Individual lenders and different finance products will work to a maximum percentage of the security value, which is known as the loan to value or LTV. For example if a mortgage facility will lend a maximum LTV of 80 per cent, then if the security is valued at £100,000 the maximum loan advance will be no more than £80,000.
The valuation of property being offered as security is crucial, however when purchasing a property the purchase price also plays an important part. Mortgage providers will lend to a maximum loan to value which is based on the lower figure of the purchase price of the property or the valuation received by the instructed surveyor. Furthermore it is rare for a surveyor to value a property at a figure greater than the purchase price, and it is common for valuations to be lower than the agreed purchase price when the surveyor feels that the purchase price is in excess of the property’s true value.
There are times when bargains can be had, for example at an auction or a distressed sale. It is common for people to stumble across these potential bargains and in order to capitalise on their find they look for finance in order to make the purchase. The most important underwriting criteria for any bridging loan is undoubtedly the value of the property being offered as security to the lender. There are many bridging loan providers who will lend based on the value of the property and not the purchase price, making a bridging loan an appealing proposition for anyone who wants to acquire a quick bargain and doesn’t have much in way of a deposit to put in themselves.
However, care should be taken otherwise potential buyers can end up disappointed and out of pocket for a valuation fee. Although many bridging loan providers are happy to lend purely based on the value of the security property, disregarding the purchase price, a surveyor will be reluctant to value any property above the price being paid for it without very good reason. It makes sense that a property is worth what someone is willing to pay for it, plus anyone selling a property will want to achieve a price that is equal to its true value. Why would someone sell their property for a price below its market value? If the purchaser is buying from a relative who is reducing the purchase price because the buyer is family then this can possible explain the lower purchase price when compared to valuation. There are in fact many other types of lenders, other than bridging loan providers, who will also accept this sort of scenario.
Remember surveyors are there to place a realistic value on a property for the lender. You may feel that by purchasing a repossession property below market value using a bridging loan you can get away without paying a deposit, but you may be very much mistaken. Just ask yourself what would happen if you don’t repay your bridging loan? The house is then repossessed again and sold for!