Loan-to-Value Ratio (LTV) for Bridging Loans

Wednesday 4th January 2023 | 2 minute read

The Loan-to-Value Ratio (LTV) of a loan amount to the appraised value of the property, is usually expressed as a percentage.

A cake with one-fifth of the cake cut symbolising loan to value ratios

What is Loan-to-Value (LTV) Ratio?

The loan-to-value ratio (LTV) is a measurement of the financial risk involved in lending money. It is calculated by dividing the amount of the loan by the value of the property used as collateral. A loan-to-value ratio for bridging loans should be considered along with a range of other factors before deciding to take them out.


How is Loan-to-Value Ratio Calculated?

The Loan to Value Ratio is calculated by dividing the amount of the loan by the value of the collateral security. For example, if you borrow £300,000 on a property worth £400,000, then the LTV would be 75%.


Is there a maximum Loan-to-value for a property type?

Yes, there is a maximum Loan-to-Value Ratio for different property types. Residential properties typically have the highest Loan-to-Value Ratio at 80%. Generally, Commercial and Semi-commercial property attracts LTVs of 65% and Land attracts LTVs of no more than 70% if the land has planning and 50% if it doesn't..


Why is Loan-to-Value Ratio Important for Bridging Loans?

Bridging loans are short-term loans, usually taken out to bridge a gap between moving from one property to another. Because these loans are short-term, there’s a much higher risk involved for the lender, so they need to be sure that they’re getting a good return on their investment.

The loan-to-value ratio helps to determine the level of risk involved in a loan. The lower the LTV the lower the risk because the lender has a larger equity stake in the property—meaning if the borrower defaults on the loan the lender will have more equity to recover their losses.

As such, lenders prefer to offer bridging loans with lower loan-to-value ratios. It’s not uncommon to find loans for bridging with a maximum LTV of 80%.


What are the Benefits of Low LTV Bridging Loans?

A low LTV ratio will reduce overall risk and help the lender to feel more secure in their investment. Lower loan-to-value loans may also be able to offer lower interest rates and more flexibility on repayments than higher LTV loans.

In addition, borrowers may be able to obtain a larger loan amount with a lower LTV Bridging Loan as the lender will be happier to offer them larger amounts of money in exchange for less risk.


What are the Drawbacks of Low LTV Bridging Loans?

Low LTV loans typically require a higher deposit, cash stake, or equity contribution from the borrower. The more equity the borrower puts into the loan, the lower the risk and the higher the loan amount the lender is willing to offer.

For some borrowers, higher deposits could be difficult to come up with in a short space of time and could mean they are unable to take advantage of the benefits of low LTV bridging loans, however if they have equity available in a property then this can serve as the deposit.


Final thoughts

The loan-to-value ratio is an important factor when it comes to bridging loans.

A low LTV can offer borrowers more favourable terms, lower interest rates, and larger loan amounts. However, it does come at the cost of requiring a larger deposit or equity available, which could make it difficult for some borrowers to access. By considering the loan-to-value ratio, along with other factors, borrowers can make an informed decision on whether to take out a bridging loan.

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