The difference between Net and Gross loan calculations in bridging finance

Anna Lewis of Castle Trust Bank explains why it is important to know whether a bridging lender uses Net or Gross calculations for loan sizes and how the different approaches could impact your clients.

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Related topics:  Specialist Lending
Anna Lewis commercial director at Castle Trust Bank
31st January 2023
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The learning objectives for this article are to:

  • Understand the difference between Net and Gross loan calculations in bridging finance.
  • Explore how the different approaches might best suit a client’s requirements.
  • Recognise scenarios where a Net loan calculation may enable a client to achieve a higher loan size.

The bridging market is growing. Figures from the Association of Short Term Lenders (ASTL) show that the total value of bridging loan books exceeded £6bn at the end of 2022 and more brokers are recognising bridging finance as a flexible source of funding for a number of investment and business scenarios. The market continues to be competitive and is encouraging more brokers to look at bridging as a potential solution for their clients.

For brokers who deal with bridging less frequently, one area that sometimes causes confusion is the difference between Net and Gross loan amounts and the impact this has on maximum available LTV. This can be confusing because different lenders will take different approaches, so it’s important for you to know the approach a lender is taking from the outset.

Net v Gross

The Net value of a bridging loan is the capital that is borrowed before any additional costs are added, including the arrangement fee and any interest that is not serviced and added to the loan balance.

The Gross value of a bridging loan is the total amount that is owed at the end of the term of the loan, including additional costs such as arrangement fee and interest. Once the additional costs of borrowing are added, the new amount is referred to as the gross bridging loan amount.

Whether a loan is calculated as a Net amount or Gross amount becomes most important when it comes to quoting a maximum LTV to which a lender can lend. Some lenders use the Net value of a bridging loan, while others use the Gross loan amount.

This means that, at the outset, it can look like some lenders are prepared to lend to higher LTVs than they actually are.

Maximum LTVs

The best way to explain the impact of Net and Gross loan calculation on how much a client may be able to borrow is with an example.

Say there are two different bridging lenders that both say they are able to lend up to 75% LTV, but one of those lenders caps its LTV on the Net value of the loan, while the other lender caps it on the Gross value. Given that this Gross value includes all of the additional costs, the actual amount that the lender is able to advance, will be smaller if these additional costs were to push the loan size above the maximum LTV.

This can make it more difficult to compare lenders as a lender whose maximum LTV is 70%, for example, based on the Gross value, might actually be able to advance more than a lender that can lend up to 75% LTV on the Net value.

In these circumstances, it can be a case of working out the calculations to understand which lender best suits your client. Fortunately, help is at hand, and a good BDM for a lender will be able to explain how it applies its maximum LTV and what impact this will have on your client.

At Castle Trust Bank, we have recently revamped our Bridging range, with a number of new enhancements including the ability for fees and interest to be added to the loan above the maximum Net LTVs on our Light Refurb and Heavy Refurb Bridge products. This means that fees and interest can be added to the loan above the maximum LTVs.

By switching to Net LTV calculations on our Light Refurb and Heavy refurb products, we’re enabling brokers to help their clients to borrow more as fees and interest can be added to the loan above the maximum LTVs.

Case Study

Castle Trust Bank recently agreed a bridging loan on a property in Southsea, Portsmouth, that was valued at £390k. The client had owned the property for four years and wanted to refinance on a 12-month Light Refurb Bridge to re-decorate and fit a new kitchen and bathroom. It was estimated that these renovations would take the value of the property to £450k, enabling the client to increase his rental yield.

We were able to quote the client an 80% Net LTV loan of £312k, subject to the rental figures being high enough to fit the stress test.

The client was very happy with this as the loan size he was able to achieve was significantly more than the 80% LTV Gross and 75% LTV Gross quotes he had received from other lenders.

As a comparison, the rate we offered on this loan was 0.89% per month. At this rate, and on the same 12-month term, an 80% LTV Gross loan would have provided the client with just over £278k – nearly £34k less than the amount we were able to offer. On the same rate and term, a 75% LTV Gross loan would have only provided £263k – nearly £50k less than he achieved with Castle Trust Bank.

Based on this example, here is how the numbers stack up:

  Available loan size
80% LTV Net £312k
80% LTV Gross £278k
75% LTV Gross £263k
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To recap, this article has helped you...

  • Understand the difference between Net and Gross loan calculations in bridging finance.
  • Explore how the different approaches might best suit a client’s requirements.
  • Recognise scenarios where a Net loan calculation may enable a client to achieve a higher loan size.
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