What Does LTV Mean in Reference to Bridging Finance?
One of the major factors that lenders consider when assessing loan applications for properties is Loan to Value, or LTV.
The calculations associated with Loan to Value are an important part of a lenders decision making process when approving different loans including bridging finance, commercial & residential loans, and first or second mortgages.
Although lenders are well versed in the importance of LTV, many borrowers lack a good understanding of what this calculation means for their loan application.
Loan to Value and Lender Risk
Loan to Value is expressed as the ratio of how much an applicant owes on a mortgage compared to the value of the home or property. When considering these ratios, lenders will take the time to calculate the LTV and tend to lean toward applicants who have a lower percentage, which translates into a lower risk for approving and supplying the loan.
A lower Loan to Value means that the borrower is more able to pay his or her repayment amounts consistently and on time, which means more security for lenders.
Let us consider an applicant who is holding a £50,000 mortgage on a home or property that is worth £100,000. Based on these values, this applicant will have a Loan to Value percentage of 50 percent and equity on the property of £50,000 – the mathematical difference between the mortgage and property’s value.
This is generally considered a low LTV percentage and offers the applicant more opportunities.
Does an Applicant’s Credit Score Effect their Loan to Value Percentage?
When calculating an applicant’s Loan to Value percentage, a credit score is not factored into the equation. It is, however, another significant aspect for lenders when considering a loan application. An individual’s credit score will help reveal their borrowing habits and repayment history, which is important evidence for a lender to know when they are considering extending a loan.
If an applicant has a less than perfect credit score, a low LTV percentage will generally overrule the lender’s concerns.
Bridging Loan Interest Rates and Loan to Value
Loan to Value percentages are crucial calculations for lenders to make their initial decision regarding a loan but they also play and important role in deciding the interest rates that will be associated with the financing.
Interest rates for bridging loans are generally based on the lenders overall risk for supplying funding – the lower the risk to lenders, the lower the interest rates. So, generally speaking, an applicant with a low LTV percentage and good credit score should see the lowest interest rates available.