When looking to obtain a bridging loan, borrowers must consider several factors in order to get the best deal. Interest rates and loan size are two such factors, but one of the most important ones is Loan To Value (LTV). This is especially true for property developers, as this factor alone can influence how heavily a developer can leverage their finances to make investments. The higher the LTV, the smaller a deposit a property developer must make, allowing them more flexibility with their liquid capital.
This has led many property developers to ask the question – is it possible to take out a bridging loan with no deposit? In this article, we will answer this question, discuss how LTV impacts bridging loans, and explain what this could mean for you. Let’s get started.
What is a bridging loan?
A bridging loan is a somewhat niche form of secured loan, one that has speed and flexibility as its two main advantages. Bridging loans are a short-term solution, with most lasting no more than 12 months. Although short, this is not typically a problem, as bridging loans aim to “bridge” the gap between the purchase of an asset and a long-term form of finance. In the property development industry, this often takes the form of selling on a property once it has been refurbished, or the acquisition of a mortgage or another long-term financial solution. In either case, the bridging loan will be repaid in full quite quickly.
While bridging loans are certainly an effective solution in many situations, they are not perfect. As a secured form of finance, bridging loans will require the borrower to use their assets as collateral. Although this isn’t a risk by default, for borrowers in a precarious financial position, leveraging assets could be a risky endeavour. Bridging loan lenders will place a lien against collateral assets as part of a loan agreement. This entitles lenders to seize assets in the event the borrower cannot make repayments. Naturally, this could be disastrous for individuals in a tenuous financial position, as the seizure of an important asset could be enough to tip them into individual insolvency. As such, it is vital to exercise caution, especially if you are not in an especially strong financial position.
How do deposits work in bridging finance?
In bridging finance, deposits go hand-in-hand with LTV, which we will discuss in more detail later. Deposits also take the form of a “commitment fee”, which will be paid shortly after a successful application, essentially paying the lender for the administrative work they do during an application, even if the borrower backs out. Many bridging loan lenders will return this commitment fee once the deal is confirmed by both parties, though this will depend on your particular lender.
In addition to a commitment fee, lenders will expect borrowers to also pay a deposit on the asset being purchased. The value of the deposit will depend on what the LTV is in your bridging loan agreement. Generally, a bridging loan lender will be willing to provide an LTV of up to 75%, meaning the borrower must pay a deposit of 25% of the asset’s value. However, it is possible for a lender to provide an LTV higher than 75%, with some going as far as 100%.
What is Loan To Value?
At its roots, LTV is a tool that can be used to determine the amount of money a borrower is requesting compared to the value of the asset they intend to purchase. For example, assume a borrower intended to purchase a property valued at £300,000. They have £60,000 to put forward as a deposit, but cannot find a means to raise any further capital. If they obtained a bridging loan to cover the remaining cost, the LTV ratio would be 80%, a figure that is considered high, but not all too uncommon in bridging finance.
The LTV ratio has a considerable impact on a bridging loan’s interest rates and potentially other fees. A high LTV, such as the one described above, constitutes a higher risk for lenders, as they expose more of their capital to secure a purchase. If, for example, a development project doesn’t achieve its goals, the lender stands to lose out. To offset this risk, bridging loan lenders offering loans at a high LTV ratio will usually ask for relatively high interest rates, and could have a few additional fees in their loan agreements. Conversely, a low LTV of roughly 60% constitutes a much lesser risk for lenders, as they put forward a smaller amount of their capital. As such, they tend to have lower interest rates and are generally cheaper than their high LTV alternatives. Which is best for you will depend on your particular situation.
Can I get a bridging loan with no deposit?
As a bridging loan with no deposit is one with an LTV ratio of 100%, it is understandably a rare commodity on the bridging loan market. This isn’t to say one is impossible to find, however; bridging loans with no deposit do exist, but they don’t often come cheap. At the bare minimum, borrowers can expect to pay a premium in interest rates and potentially additional fees depending on their specific loan agreement. What is much more likely is that they will be expected to secure the loan against assets of considerable value. These assets will act as security, lessening the substantial risk assumed by the lender for giving out a loan with a 100% LTV.
Conclusion
Although it is possible to obtain a bridging loan with no deposit, it won’t come cheap. Borrowers looking to do so should prepare to pay a hefty amount of interest, and use valuable assets as collateral to secure the loan against. Naturally, this will expose the borrower to the risk of having said assets seized in the event they cannot make repayments. All this is to say that while it is possible to obtain a bridging loan with no deposit, it may very well not be worthwhile, especially if there are other options available to you. As always, it is best to consult a financial specialist for professional advice on what option is best for you.