It is possible to borrow between £15,000 to £25 million for a bridging loan but the typical loan value is around £150,000, which is typically used to buy a property when there is a strict deadline. So rather than losing out on the property by having to wait for a mortgage or some with a better offer comes along and risk of being gazumped, you can borrow the funds you need to secure the deal. Other uses of bridging finance include home refurbishments, buying at an auction and investing in a business opportunity.
When it comes to determining how much you can borrow, there are several factors involved. Some individuals will try takeout as much as they can and others will try borrow less to avoid paying lots of interest. But it is important to find just the right amount so you can maximise the profits on your property investment (perhaps when you sell the estate) and of course, be able to keep up with repayments without falling into default.
The main factors that affect how much you can borrow include:
- The loan to value (LTV)
- The type of security/investment opportunity
- The borrower’s credit score
- First charge or second charge
- Income and affordability
Loan to Value
The loan to value (LTV) is the percentage of the loan compared to the entire value of the property. To give a practical example, if you are trying to buy a property worth £1 million and you apply for a loan with a LTV of 70%, you will be trying to borrow £700,000 and the remaining £300,000 you will need to put in yourself and this is known as your ‘equity.’
To get an accurate LTV, you need to have your property valued and then share this information with the lender. They will use this as an important factor when assessing how much you are able to borrow. But just because you want to borrow 70% of the property’s value does not necessarily mean this will be the case as there are lots of other factors involved. For instance, if you are a repeat customer for the lender and have found a good property to invest in that you plan to resell in the next year, this would present a good opportunity and you may be rewarded with a higher LTV. Similarly, if you have a very good credit score, you are considered a low risk of defaulting, so this will also help you to maximise your borrowing facility.
The Security and Investment Opportunity
Bridging loans are used for many things, but mostly property development and opportunities. When deciding how much you can borrow, bridging lenders will always look at the value and potential growth of the property you are looking to buy. The loans are secured on the property so if the borrower fails to keep up with repayments and all other options such as refinancing have been exhausted, the lender may repossess the property in order to recover their losses. So when lenders consider how much you can borrow, they look very carefully at the security on offer and may ask you to submit a business plan if you are going to be renovating and reselling it.
If the property you wish to buy is in a thriving area and shows good growth over the next few years for when you want to sell it, the loans provider will believe that this is a good proposition and this will help you borrow the amount you have requested. It is also common to use a bridging loan for an investment opportunity when there is a deadline or to invest in your own business. Maybe you need new offices or to hire new staff in order to grow your company. However, this needs investment and this is where bridging finance can help. To determine how much you can borrow, again, the lender will review the business opportunity and look at the growth of your company when making their decision.
Your credit score is a numerical value from 0 (lowest) to 999 (highest) based on Experian’s model and this number reflects your creditworthiness and likelihood that you will repay a loan. A credit score or rating takes into account how well you have paid other types of credit and loans in the past, how many loans you have outstanding and how many applications you have made, amongst other things.
For unregulated bridging providers or ‘non status lenders’ as they are also known, they are not required by regulation to run credit checks nor do they particularly use credit scoring as part of their decision process. Instead, they will look more closely at the opportunity and security available when deciding the loan value.
First Charge vs Second Charge
The ‘charge’ of the loan refers to where it stands in the priority of getting paid. The first charge is the main loan on a property and although a 1st charge can be a bridging loan, it is typically a mortgage. To get an additional loan on your property would be the 2nd charge.
This is relevant because when a lender considers how much money to give you, knowing that the loan is a 1st charge means they will have the first access to the property if they need to repossess it in order to cover their losses. However, if the loan they are providing is a second charge, then it means that if the customer defaults on their loan, the lender has to wait until after the mortgage has been paid off and then only after, can they try recoup any left over funds.
Therefore, being a 1st or 2nd charge loan adds different risk to the loan being offered. Typically a first charge loan can get a loan-to-value of up to 75% compared a second charge which can only get a loan to value of up to 65%.
Income and Affordability
In addition to considering the purpose and security for your loan, some lenders will review your income and affordability. For businesses, this may involve showing your company accounts or for an individual, this may require showing a copy of your pay-slip and bank statement to confirm your affordability. The reason for this is to ensure that the company can still receive monthly repayments before the sale of the property has gone ahead. It is therefore the responsibility of the lender to match up how much they can afford to borrow and repay without going into debt.
Some other lenders do not consider income or affordability at all and purely make their decision on how much the property will be worth at the point of sale. So whether the individual is even employed may not be an issue – but again, this depends on the lender.
Below are some examples of the amounts you are able to borrow from various bridging lenders:
Minimum Loan: £10,000
Maximum Loan: £5,000,000
Minimum Loan: £100,000
Maximum Loan: treated on a case-by-case basis
Minimum Loan: £100,000
Maximum Loan: £5,000,000
Minimum Loan: £50,000
Maximum Loan: £250,000,000
Minimum Loan: £75,000
Maximum Loan: £10,000,000