What’s the difference between first and second charge bridging loans?

What’s the difference between first and second charge bridging loans?

To ensure that you don’t miss out on an investment opportunity, especially if it’s time-sensitive, a bridging loan may be a good solution for you. This is a flexible form of funding that’s quick to arrange. It’s taken out on a short-term basis, such as up to 12 months, and bridges the gap while you organise your next financing source. When looking at bridging finance, you may come across the terms ‘first charge’ and ‘second charge’. Here, we’ll explain what those terms mean and the differences between first and second charge bridging loans.

What is a first charge bridging loan?

A bridging loan is secured against an asset, which is usually a property, although various types of assets are considered by lenders depending on your situation. For example, if you wish to use a bridging loan for your business, you can use the equipment or heavy machinery as security. If you’re a high net worth individual, lenders consider personal assets, such as boats and sports cars.

The lender places a charge against the asset, which allows them to seize and sell it to recoup some of their money if you default on your payments. The order in which lenders are repaid in this way depends on the priority of the charge.

If the bridging loan you take out is the only loan secured against your property in Bexleyheath at that point, it is classed as a first charge bridging loan. Should you fail to repay the loan, the first charge lender has priority to repossess and sell your property. Once they have been repaid, any subsequent lenders with a charge against the property can then recoup their money.

What is a second charge bridging loan?

If there’s an existing loan for the property, such as a mortgage, when you take out the bridging loan, it will be classed as a second charge bridging loan. This means that the lender will be second in line when it comes to being repaid in the event you default on your payments. Second charge bridging loans are, therefore, more of a risk for lenders.

Differences between first and second charge bridging loans

Aside from the order in which lenders can recoup their money, there are other differences between first and second charge bridging loans. These include:

  • The amount you can borrow. First charge lenders usually offer a higher loan-to-value (LTV) than second charge lenders. The value of your property and the equity in it will determine how much you can borrow for a second charge loan.
  • The interest rate. This tends to be higher for a second charge bridging loan as it poses a higher level of risk for the lender.
  • Lender’s consent. The first charge lender usually needs to consent to a second charge loan. Not all lenders allow a second charge to be placed on a property where they have the first charge.

Why take out a second charge bridging loan?

If you already have an existing loan for your property, second charge bridging finance provides you with additional funds. You may need to inject some cash into your business, for example. Or you may want to invest in a new development project but haven’t sold the finished units from your current project. You may have seen a bargain property at auction that you want to snap up as a rental investment. Or you may want to pay off some outstanding debts or large bills that have become due. By using the equity in your property as security for a second charge bridging loan, you can access the funds you need in addition to and without changing your original loan.

The benefits of applying for a second charge bridging loan

This popular type of loan offers numerous benefits, as detailed below.

It increases your borrowing potential

You can borrow the funds you need despite having an existing mortgage or other type of loan. This is beneficial if you don’t want to change the loan you already have or if your current lender won’t agree to lend you any more funds.

You have fast access to funds

Bridging loans are quick to arrange, which is beneficial if you need a fast injection of cash. Having a bridging loan means that you don’t need to worry about missing out on a potential investment opportunity or being unable to pay a large bill.

You can keep your existing mortgage

If you have a good rate or flexible terms for your mortgage, you may be reluctant to change it. Having a second charge bridging loan means that your mortgage rate and terms will remain intact.

It’s a way to avoid an early repayment charge

Another reason to use a second charge bridging loan rather than altering your mortgage can be to avoid an early repayment charge (ERC). Check the terms of your mortgage to find out if an ERC would be payable. If so, compare the ERC figure with the fees payable for a second charge bridging loan to help you make the best decision.

The affordability criteria are easier

Mainstream lenders have strict affordability criteria whereas bridging lenders offer more flexibility. This flexibility is helpful if you’re struggling to meet standard affordability requirements. With a mainstream lender’s criteria, you may not earn enough to borrow the amount you need, for example. Or you may have a non-standard income stream, such as if you’re self-employed or a high net worth individual. Bridging lenders are more concerned with the equity available in your property and your exit strategy. The exit strategy is how you intend to repay the loan.

Bad credit applications are considered

As mentioned above, second charge bridging loan applications are assessed more on the equity available and the exit strategy rather than standard affordability checks. This means that bridging lenders are more willing to accept applications from borrowers with bad credit. As a second charge bridging loan poses more of a risk to a lender than a first charge loan, it’s a little more challenging to arrange but is, nonetheless, possible.

It’s a short-term loan

Unlike a second charge mortgage, which enables you to borrow funds over a long term, a second charge bridging loan is a short-term loan. This means that you can repay it much faster and be debt-free quicker.

It provides flexibility

Bridging loans have all manner of uses, providing you with a flexible form of funding. For example, an unexpected bill may need to be paid, you may need an urgent cash injection in your business or you may want to refurbish your property. As a developer, you can raise funds for a new development project before selling or refinancing your current one. With a bridging loan, you can buy a new property, such as a buy-to-let investment, for HMO purposes or to expand your business. This is particularly helpful when time is of the essence, such as buying a property at an auction. You can also buy an uninhabitable property, which you wouldn’t be approved for when applying for a mortgage.

Applying for a first or second charge bridging loan

Whether you need funds for a time-sensitive investment, want additional funds without affecting your mortgage or are struggling to meet the affordability criteria for another type of loan, a first or second charge bridging loan is a good solution.

Give our mortgage brokers a call on 01322 907 000 to discuss bridging finance and your situation in more detail. They will ascertain how much you can borrow and ensure that you have a strong exit strategy. They will also ensure that any potential issues have been identified and solutions put in place to strengthen your application.

Our specialist brokers have considerable expertise in this field and have formed close relationships with bridging lenders. As such, they will tailor-make your application and arrange the best bridging loan for your needs. You can look forward to a fast transaction, allowing you to move forward with your plans quickly.