Lena would like to purchase a property that needs refurbishment at an auction. The purchase price is £900,000. She needs £450,000 to complete the purchase. Lena will attempt to raise this by using a first legal charge over the property for a period of 9 months. At the end of this 9 months, Lena will refinance to a buy to let mortgage and rent the property out.
| Purchase Price | £900,000 |
| Loan Requested | £450,000 |
| Net LTV | 50% |
At this point, it is important to note that the lower the LTV (which is the percentage size of the loan compared with the value of the property being used as security), then the better the interest rate. Finbud will help Lena by obtaining an unregulated bridging loan with a low interest rate charge of 0.44%. Don’t forget that there will be a 1% lender arrangement fee to be added onto that.
| 0.44% interest x 9 months | £17,820 |
| 1% Lender Arrangement Fee | £4500 |
The arrangement fee can be added onto the loan and the monthly payments rolled into the loan which will mean that that there will be nothing extra to pay at the end!
So ….what will be the total amount that Lena will need to pay back by taking out this loan?
The below table clarifies this:
| Loan Amount | £450,000 |
| Arrangement Fee | £4500 |
| Total Interest | £17,820 |
| Total to Repay | £472,320 |
If we look at this carefully, we can see that the additional amount Lena has to pay is £22,320
Don’t forget that Lena will have to pay other extra fees not calculated here such as a fee for the valuation report which would usually be paid upfront and legal fees.
Once the loan has been paid, then the charge is taken off.
Points to note from this example:
For loans below 50% LTV, better interest rates can be obtained. The LTV used to choose the interest rate or fix the maximum net amount that needs to be borrowed is calculated from the gross loan. This ‘gross loan’ is equivalent to the total of the net loan that is needed plus arrangement fees which is added to the loan plus the interest rate charge applicable should the loan run for the full term. The advantages of having a longer term is that it will give a borrower more time to re-pay. Although the advantages of a shorter term would be that the total interest rate charge would be lower.
