Since bridging loans are always secured against an asset (usually a property), lenders must value the asset to ensure it’s of sufficient value. But where speed is of the essence, is a valuation necessary?
Businesses that need to act quickly can’t afford to wait for traditional financing, and that’s where commercial bridging loans come in. Due to their fast approval times, the market is growing quickly, with a current record of £831 million in Bridging Loans transacted.
Since bridging loans are always secured against an asset (usually a property), lenders must value the asset to ensure it’s of sufficient value. But where speed is of the essence, is a valuation necessary?
We investigate the role of valuations in bridging loan applications and explain how these valuations impact loans.
Why lenders typically require valuations
Every loan is an investment for a lender, just as taking out a loan is an investment in your business. Property valuations allow lenders to assess the value of a loan application to determine whether it’s a good investment for them.
Additionally, conducting an in-depth valuation confirms a property’s actual value and condition, allowing lenders to decide on loan-to-value (LTV) ratios, loan terms and interest rates. Plus, from a practical standpoint, valuations provide tangible proof of an asset’s worth.
For example, if value was taken at face value, an unscrupulous applicant could throw out any number they wanted and there would be no way of telling whether it’s genuine, putting the lender’s capital at risk.
Do you need a valuation for a bridging loan?
Bridging loans always require some form of valuation to confirm the value and condition of the asset. Unfortunately, with many businesses requiring quick funding, delays in the traditional valuation process can quickly compromise the applicant’s timeline.
Lenders have reacted by diversifying and streamlining the valuation process to speed up approval rates while protecting their own interests. It’s one of the reasons the bridging loans market is expected to grow by 25% over the next five years.
Different valuation methods can come into play, and understanding each type of valuation and its impact allows you to get the best bridging loan for you.
Types of valuations
In the UK, it’s the responsibility of the Royal Institution of Chartered Surveyors (RICS) to set appropriate standards for all manner of property valuations. The trust they’ve developed enables lenders and applicants to trust the accuracy of valuations.
So, what type of valuations might be deployed?
Note that not every lender offers all types of valuations, so it’s essential to confirm which valuation methods they will accept, as this could impact your timeline.
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How valuations impact bridging loans
Valuations remain the cornerstone of any loan application because they are the main form of protection for the lender if you’re unable to repay your loan. It also determines your LTV ratio, influencing how much you’re eligible to borrow.
The LTV is expressed as a percentage because a lender will only lend a maximum percentage of the property’s total value. Although 100% LTV bridging loans are available, they’re extremely rare and difficult to come by. Most lenders set a maximum threshold of 60-75%.
Typically, a lower LTV will secure you more favourable terms and rates because it reduces the risk to the lender.
But what happens if your valuation is lower than expected? In this case, there are really only four routes available:
1. Challenge the valuation if you believe it’s inaccurate.
2. Negotiate and ask for a higher LTV.
3. Secure your bridging loan against an additional asset.
4. Look at other financing options to get the capital you need.
Factors that can influence a valuation for a bridging loan
Your valuation will depend on multiple factors. Understanding these factors can help you know what to expect and provide a rough idea of what your property might be worth. Of course, valuation isn’t an exact science, so you might get two completely different numbers, but most valuers will use the same factors.
Here’s a rundown of the main factors influencing the final valuation:
Regardless of the valuation method, you’ll receive a valuation report expressing the methodology used and the factors used to reach a final figure. This figure will then determine your LTV ratio, which the lender can use to decide on terms, interest rates, and whether to lend to you.
With this in mind, preparing your property as part of your application is vital. Likewise, it’s essential to approach a selection of lenders and have a financial plan B if things don’t go your way. That’s why at Hilton Smythe, we are your access to the industry.
As a specialist broker, we help you avoid the most common pitfalls that can cost your business valuable time and money. To learn more, contact us to get your free consultation today.