Which way for bridging LTVs?
By Jonathan Sealey, CEO
Bridging LTVs have been heading higher. There are some that say this is irresponsible on such a risky loan, but there is another point of view that says LTVs can, and sometimes should, be higher on a really strong case.
What it should actually come down to is the individual loan and the viability of the project. While few bridging lenders have traditionally lent more than 75% LTV, with some lower than that, there are times where it is entirely sensible to go above this.
Key reasons that a lender might exceed their own LTV limits are:
The project stacks up
This often means a building that will be refurbished, so will be worth significantly more after the work is done than it is at the point of the initial purchase. So while the initial LTV may well start high, after the work it will often fall below the lender’s normal LTV.
An experienced borrower/developer
Lenders are often willing to lend more to someone they are familiar with and have worked with successfully in the past. A seasoned developer who has proven themselves to be competent may well be lent more money, especially if the lender has worked with them previously.
An experienced broker
Brokers who introduce a lot of bridging business will usually have worked out if a case stacks up before introducing it to the lender. Often they will have carried out their own background checks and will have made a pretty good judgement on the potential viability and profitability of a case before deciding which lender to approach. The broker’s involvement is often essential to the success of a bridging loan project, both when the loan is being arranged and in ensuring there is a successful exit. Therefore a lender, even while doing their own due diligence, may be more inclined to look at a project outside of their normal parameters if it has been introduced by a well-respected broker, especially one that has worked with the lender previously.
Example case study
Property type: Residential
Term: Eight months
A borrower had the opportunity to purchase a property in need of refurbishment in Richmond, London. The refurbishment works included a full conversion of the layout of the apartment, including creating an extra bedroom.
The client was to fund the refurbishment themselves and had already paid 10% deposit. Despite some additional funds, however, they still required a loan at a high LTV of 82%.
The borrower had successfully completed a number of other refurbishments and had borrowed funds from Hope Capital previously. All the other projects had made significant profits following completion.
Due to Hope Capital’s relationship with the borrower, we were able to facilitate a higher LTV than we would usually consider.
Hope Capital granted an eight-month loan facility. This took into account the works that were due to be undertaken, and the increase in value this would bring to the property.
All works were completed within three months, ready for the property to be marketed for sale. Once refurbishment was complete, the LTV dropped down to just 59%.
Hope Capital closely monitored the refurbishment works and effect on value throughout the term of the loan, visiting the site frequently.
By working with Hope Capital, the borrower was able to take advantage of an opportunity to increase the value substantially and received an offer £225,000 above the initial purchase price, enabling them to grow their property portfolio.
So where next?
This case study is a perfect example of the rationale for higher LTVs on the right case, but just how high should LTVs go?
Some lenders believe that they can lend even up to as much as 100% LTV on a property about to be developed – although they also talk about taking additional security. The argument is then, is the loan actually 100% LTV if additional security has to be provided? But it may well be a solution to someone who is asset-rich and relatively cash-poor at the point of needing the loan. It certainly shows a lender’s ability to think creatively and find solutions.
The answer, surely, has to be that every case needs to be weighed up on its own merits. With the right lender, broker and borrower almost anything is possible. Of course, not every lender has the ability to be this flexible, but that is where the services of a good broker become invaluable – knowing the lenders they can place their clients with and get the deal accepted.