Weighted Average Interest Costs
Coupled with the lower funding cost of a typical 65% loan-to-valuation ratio first mortgage loan, the weighted average interest cost of the total finance package is very affordable to the borrower and is less costly (and hassle-free) than a profit share arrangement with a partner. An example of the weighted average cost of the funding for a loan of $1.6 million, with a total loan to valuation ratio of 80%, on a property valued at $2 million, is as follows:
|
Detail |
Loan to Value |
Loan Amount |
Rate |
Interest per annum |
|---|---|---|---|---|
|
1st Mortgage |
65% |
$1,300,000 |
7.0% |
$91,000 |
|
2nd Mortgage |
top 15% |
$300,000 |
25.0% |
$75,000 |
| Totals | 80% | $1,600,000 |
8.3% |
$166,000 |
The returns to the lender are commensurate with the risk taken at the high loan-to-valuation ratio and second ranking priority in recovering the loan principal.