Bridging Loan Deposit

Stuart91

I’m hoping someone might be able to lend some advice.

I am looking to buy a second property to carry out some light refurbishment and ultimately rent out (I currently own my main residence). I am considering taking out a short term bridging loan to cover the cost of the property before having it revalued before refinancing onto a buy-to-let mortgage.

My question is regarding the deposit for the bridging loan. I know that the typical LTV ratio for a number of bridging loans is 75%, therefore requiring a 25% deposit. I am wondering if anyone is able to advise of the following- if the property I am looking to purchase is validated at £100,000, but I am able to purchase at below market value of £90,000, would I only have to provide a deposit of £15,000 as I am able to borrow 75% of the market value? Or would I only be able to borrow 75% of the purchase price (as strictly speaking the value of the property would only be £90,000 if that is the maximum price willing to be paid for it)?

Anyone with experience with this and able to provide some advice would be much appreciated.

G_M

Surely the point of a bridging loan is that it is unsecured? If it is secured against the property, then it's a mortgage.

I'd imagine eligibility for a bridging loan is based on income.

Maybe I'm wrong/missing something?

ps - I've purchased a property in the past on 0% credit cards. Did the refurb, got tenants in, applied for mortgage and paid off the cards.

eddddy

Stuart91 wrote: »

if the property I am looking to purchase is validated at £100,000, but I am able to purchase at below market value of £90,000, would I only have to provide a deposit of £15,000 as I am able to borrow 75% of the market value?

With a 75% LTV bridging loan, you will be able to borrow up to 75% of whatever the lender values the property at.

Their valuation might be more or less than what you paid for the property.

Also, different lenders may use different types of valuations. For example, there's the 'Open Market Value' and the '90 day value'.


The 'Open Market Value' means the price you might get if you're willing to put the property on the market for some time.

The '90 day value' means the price you might get if you have to sell within 90 days. (That might be around 10% lower than the Open market Value.)


Edit to add

And bridging loans are secured against property. Often no proof of any income is required.

ACG

There is no such thing as BMV unless you are buying from family. Why would someone sell it below what it is worth?

Typically 75% is where the loans top out, there are lenders who will go above that, but you will start to see rates increase (potentially as high as 2% per month).

G_M bridging loans are secured loans. They are technically mortgages in the truest sense, but are just referred to as bridges/bridging loans as they are short term loans.

steampowered

The interest rate on bridging loans can be horrendous. Plus you'll pay a c. 2% arrangement fee.

Think very carefully before you do this.

davidmcn

G_M wrote: »

Surely the point of a bridging loan is that it is unsecured? If it is secured against the property, then it's a mortgage.

They can be secured or unsecured, their distinguishing feature is that they're short-term. "Mortgage" = a secured loan, or just the charge itself.

Stuart91

In Scotland all properties are required to come with a survey which states a valuation within the report from a professional surveyor. So that is what I mean when I say “below market value”, as lenders have to have some benchmark on the ‘value’ of the property to dictate the amount they are willing to lend.

I agree that if buyers are only willing to pay a maximum price of a certain amount then that is really the true market value of the property, but this is not necessarily the same figure that lenders will be working to when viewing the property’s ‘market value’.

Stuart91

PS. Some people would sell their property below market value for a whole number of reasons. They are called motivated sellers.

davidmcn

Stuart91 wrote: »

I agree that if buyers are only willing to pay a maximum price of a certain amount then that is really the true market value of the property, but this is not necessarily the same figure that lenders will be working to when viewing the property’s ‘market value’.

But it's pretty unlikely that a surveyor would value the property at more than the figure it's just been sold for on the open market.

ACG

The only people who sell below market value are those up a creek without a paddle and that is not motivation that is a Distressed sale which lenders do not like.

There is a difference between selling at the bottom end of its valuation and below market valuation.

Stuart91

“Motivated seller” is the phrase, albeit they may be considered distressed depending on the circumstances they find themselves in and their reasons for selling. I do though think it is reasonable to say certain sellers will sell their property for below the figure a lender would value it at (and therefore ‘below market value’ in relation to a lender’s opinion- which is important when working out how much finance you can reasonably take out and the deposit required). I agree the true market value is the price the buying market is willing to pay for it, but when referencing ‘market value’ I am more concerned about the figure a lender would ‘value’ it as, which can very often be higher than the price the vendor ends up selling it for.