Gross vs Net: why a 75% loan isn’t 75%

Start with your payslip

This is how I explain it to clients, and it works every time.

Look at a payslip. On the left is the gross figure, what you’re paid. Say you’re on £36,000 a year, so £3,000 a month. Nobody on £36,000 thinks £3,000 arrives in their account. You look to the right and there’s national insurance, there’s tax, there’s the pension, there are all sorts of bits and bobs coming off.

And then at the bottom right, in bold, is the net figure. That’s the money that actually reaches your bank.

Bridging works exactly the same way.

The gross loan, sometimes called the total facility, is the big number. It’s the 75%. It’s the 80%. It’s the figure lenders advertise: we do 75% loan to value. What they don’t say is we do 75% loan to value, gross. Then it all gets netted down, and the money you receive is a good deal less than the loan to value they quoted.

Why lenders do it this way

Most people will just tell you this is the gross, this is the net, these are the fees, take it or leave it. I would rather you understood why, because then the number stops being a nasty surprise and starts being something you can plan around.

Take a property you’re buying below market value that isn’t liveable or lettable. Fire damage, maybe. Needs a new kitchen, new plumbing, a rewire. Whatever the reason, nobody is moving in.

The lender knows that. And if nobody can live in it, you can’t let it out. If you can’t let it out, there’s no rental income. And if there’s no rental income coming in, how are you servicing the loan?

There are ways to service a bridge, and that’s a subject of its own. But on a property that produces nothing for six months, the lender isn’t going to rely on you finding the payments from somewhere. So they take the interest out of the facility at the outset.

That’s the whole logic. They approve a gross facility, deduct the fees and the interest from it, and advance you what’s left to buy the property with.

The rough numbers to hold in your head

People come to me and say: I have a 25% deposit. On a £100,000 property, I have £25,000, so I only need a £75,000 loan.

The gross loan will be £75,000. Then off comes the arrangement fee, the legal fees, the land registry fee, the interest, all of it. And what’s left?

• On a 75% gross facility, the net usually comes out somewhere around 60% to 65% of value.
• On an 80% gross facility, the net is usually somewhere around 70%.

Those are rules of thumb rather than promises, and the term drives them more than anything else. But they’re close enough to plan with, and they’re a long way from the headline.

A real term sheet, line by line

Here’s a set of terms I actually went through with a client. This was a couple of years ago, so treat the figures as illustration rather than a quote. The structure is what matters, and that hasn’t changed.

This one is slightly different to the examples above, because the client only wanted 50% loan to value on a net basis. The lender worked backwards from what he needed.

The client needed £120,000 in his solicitor’s account. So the lender started there and worked backwards to a gross of £141,403.93. The deductions came to £21,403.93.

Notice the broker fee on that sheet: £0.00. The line exists on every set of terms. It was nil on this one.

And notice “months serviced: 0”. Not a single month was paid monthly. The whole year of interest was taken out at the start, which is exactly the point about a property that produces no income.

Now look at what it means in loan to value terms. The gross is 59% of the property’s value. The money he received was 50%. Nine percentage points of a £240,000 property disappeared between the headline and the bank transfer.

What every line actually is

Legal fees. Whose solicitor does what, and who pays for it, is a subject in itself. What matters here is that it comes off the facility.

The facility fee. Also called the product fee or the arrangement fee. Usually a percentage of the gross loan, 2% on this deal.

The admin fee. Some lenders charge one, some don’t. It often depends on the size of the loan. On a smaller loan the lender makes less interest, so an admin fee appears to make the case worth doing.

The broker fee. Most brokers add their fee into the facility. Some don’t charge one at all. Ask, early.

Land registration. Small, but it’s there.

Title insurance. Not on this particular deal, but it’s often £500 to £750. It exists because bridging lenders can complete very fast, which means some of the legal work happens after completion. If something turns up on the title afterwards, the money has already gone, so they insure against it.

Retained interest. The big one. Twelve months of it, taken out at the start.

The valuation fee. This one is different from all the others, and it catches people. On the terms above it’s listed as TBC, and the sheet is explicit that it’s the only up-front fee required. Everything else comes out of the loan on completion. The valuation you pay for before you get there. Most lenders get quotes from three valuers and we pick on price, speed or proximity depending on what the deal needs.

Your own solicitor’s costs. These don’t appear on the term sheet at all. Budget for them separately, because nothing in the paperwork will do it for you.

About that 12 months

People tell me all the time: I can do this in under six months.

Good. The lender will still quote 12, whether you like it or not. They can go up to 18 and down to six, I’ve seen three, but 12 is the average and it’s what most of them work to.

The reason is simply worst case. They have to assume the works, or the sale, take a year. So they retain a year of interest.

But you only pay for what you use. Redeem in six months and you’re charged six months. Nine months, nine months. The rest comes back. So the twelve months is a cashflow question on day one, not a cost you’re stuck with.

On the terms above there were no exit fees and no early repayment charges, subject to a one month minimum. Check that on your own offer rather than assuming it, because it varies. Some lenders do charge to get out, and some hold you to a minimum term considerably longer than a month. It’s one of the first questions to ask, and it’s worth more than a small difference in the headline rate.

And it’s worth being the kind of borrower who doesn’t need the twelve. The good property investors have the builders lined up before completion. It completes Monday, the trades are in Tuesday, and the broker is already working on the exit that same week, getting documents in and booking the valuation for the month the property will actually be ready. That’s what shortens a bridge.

One last thing about “the best rate”

People come to me wanting the best rate on the market. So I get them the best rate on the market. And then there’s a pile of fees attached to it.

They do have the best rate. And the lender is still going to make its money, one way or another.

Compare the net advance and the total cost over the term. Not the headline rate, and not the headline LTV. Our page on bridging loan rates sets out the ranges honestly.

So, gross or net?

The gross is the headline: the 75%, the 80%, the number in the advert. It isn’t what arrives in your account.

Before you commit to anything, get whoever is arranging it to net it down for you in writing. What the facility is, every fee that comes off it, who gets paid what and when, and the figure that lands on completion day. Then you know what you actually have to find.

Run your own numbers first. Our bridging calculator shows the gross loan, the deductions and the net advance side by side.

Or ring me on 0330 133 4442 and we’ll net it down together in ten minutes.

Figures relate to the circumstances and the lending terms available at the time of that transaction, and the terms available to somebody else may be different. Bridging finance is short-term secured borrowing and it can be expensive. If a secured loan is not repaid in line with its terms, the lender may take enforcement action against the property or any other security provided. This is general information, not personalised advice.