## Underwriting Below Market Value Bridging Loans
Related check: [Bridging Loan Cost Calculator](/tools/bridging-loan-cost-calculator).
Primary rule references for this decision are [FCA Handbook - bridging loan](https://handbook.fca.org.uk/glossary/G2949) and [FCA responsible lending and financing rules](https://handbook.fca.org.uk/handbook/MCOB/11/6.html).
When considering a Below Market Value (BMV) bridging loan, lenders undertake specific underwriting checks to mitigate risk. A BMV loan may allow a property purchase based on its open market value rather than solely the discounted price. material, the property's valuation is a central element of the application, as lenders will not solely rely on the buyer's or seller's stated values.
Lenders investigate the reasons behind the property being offered at a discount. They need to understand the motivation for sale and confirm that the valuation supports the open market value. This assessment helps the lender determine the asset's true worth and the potential for the loan to be repaid within its short-term duration.
Furthermore, lenders scrutinise how the bridging loan will be repaid. Evidence such as a guaranteed offer or an agreement in principle from a mainstream lender, alongside necessary income and expenditure information, is sought. As per FCA guidance, when considering an extension to the term of a regulated bridging loan, the lender must apply the same underwriting standards as if it were a new loan.
**Valuation and Risk Assessment**
Government guidance on cost estimating highlights the importance of evaluating optimistic, median, and pessimistic spend to face risks. Contingency is an allowance to cover residual risks, including optimism bias where practitioners tend to be over-optimistic about assumptions. Capital and operating costs are often higher, and delivery times longer, than initially anticipated. Explicit adjustments, increasing estimated costs and timeframes while decreasing estimated benefits, are essential. Material or critical risks should be documented separately from overall contingency. Contingency should be revised as a project becomes more defined.
**Due Diligence Framework**
This typically includes checks on ownership, sold and rent comparables, legal prompts, property condition, EPC ratings, and tenancy details. For instance, a controlled example might involve 20 checks, categorised by risk level. Red items may pause the deal until resolved, while amber items could become conditions or necessitate price adjustments. The process prompts verification of ownership, legal review, condition surveys, and finance compatibility.
**Worked Example: Bridging Loan Costs**
To illustrate finance costs, consider a purchase price of £150,000 with a refurbishment budget of £25,000. A bridging loan of £112,500 is secured at 75% Loan to Value (LTV), with a monthly interest rate of 1% for a six-month term. An arrangement fee of 2% and an exit fee of 1% apply.
- Monthly interest: £112,500 x 1% = £1,125
- Six months' interest: £1,125 x 6 = £6,750
- Arrangement fee: £112,500 x 2% = £2,250
- Exit fee: £112,500 x 1% = £1,125
- Total estimated finance cost: £6,750 + £2,250 + £1,125 = £10,125. This figure excludes legal, valuation, broker, and contingency costs.
This calculation is a simplified overview; professional advice is necessary to navigate the complexities of bridging finance and property investment.