Second charge bridging loans
If you’re looking to raise capital quickly traditional financing routes can be slow and cumbersome.
That’s where second charge bridging loans step in, offering a fast, flexible solution to unlocking the equity in your property.
These loans provide a lifeline when you need access to capital without the delays or restrictions of a traditional mortgage or commercial loan.
As you leave your main mortgage in place, these loans can be set up very quickly.
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Bridging
What is a Second Charge Bridging Loan?
A second charge bridging loan is a short-term loan secured against a property that already has an existing mortgage or loan. It’s termed “second charge” because it ranks second in priority to the first mortgage.
Should you be unable to repay the loan, and the property is subsequently sold (a process referred to as repossession), the first mortgage lender is repaid first from the proceeds, with any remaining funds allocated towards repaying the second charge loan.
So the second lender is taking more of a risk than the first, and could end up not getting all of their money back.
Short-term loans that bridge a gap
You will often hear explanations of how bridging loans work by ‘bridging a gap‘.
In essence, it’s because all bridging loans are short-term in nature. You can have one for a few weeks only, right up to 36 months with some lenders.
But that’s it.
These lenders are in the business of lending fast and being repaid (quite) fast.
So the idea is that you borrow the money on a temporary basis, until a method to repay them comes in to play. We will explain this in a bit more detail later but most options involve either refinancing or selling the asset.
Read more: How long can you have a bridging loan for?
How do they work?
These loans tap into the equity in a property, or multiple properties. So you borrow against the unmortgaged part of the property.
You can usually borrow upto 80% of the property value, less any current mortgages or secured debts.
The loans are only granted for short durations, and regulated loans have a maximum term of 12 months. The borrowed money can be used for any purpose.
Once you’ve borrowed the money there’s no need for any monthly repayments. The interest is added to the loan each month and must be paid back at the end.
Related reading: Do You Need a Deposit for a Bridging Loan?
Key features of second charge bridging loans
- Short-term: Typically ranging from 3 to 36 months.
- Secured against property: The loan is secured against the equity in your property.
- Higher interest rates: Bridging loans have higher interest rates than traditional mortgages due to their short duration and the increased risk for the lender.
- Flexible lending criteria: Lenders often have less stringent criteria than traditional lenders.
- Quick access to funds: Funds can often be released within a matter of days or weeks.
Main Benefits
2nd charge bridging loans offer a range of advantages that make them a compelling option for many borrowers:
Swift Access to Capital
When time is of the essence, fast bridging loans deliver. Funds can often be released within days or weeks, allowing you to act quickly on opportunities or address urgent financial needs.
Unmatched Flexibility
Unlike traditional mortgages with rigid criteria, second charge bridging loans offer greater flexibility in terms of borrower profiles, property types, and loan purposes. This makes them suitable for a broader range of individuals and businesses.
No Early Repayment Charges
If your circumstances change and you’re able to repay the loan early, you won’t incur any penalties (with most lenders), saving you money and providing added peace of mind.
Retain Your Existing Mortgage
You can secure additional funding without disturbing your current mortgage arrangements, preserving any favourable interest rates or terms you may have.
Multi-Purpose
Whether you’re purchasing a property at auction, renovating your home, investing in a buy-to-let opportunity, or facing a temporary cash flow shortfall in your business, 2nd charge bridging loans can provide the necessary capital.
Chainbreaker
Bridging loans are well-known for assisting when a property chain breaks down. They can allow you to buy your next house while your current one remains on the market.
Accessible
Even if you have a less-than-perfect credit history or a complex financial situation, you may still qualify for a second charge bridging loan. Lenders are more pragmatic and assess your ability to repay based on factors beyond just your credit score.
Who needs a second charge loan?
An additional loan becomes a ‘second charge‘ when there’s already a mortgage in place.
This mortgage has the first charge, and is the primary lender.
The cheapest way to borrow extra money is normally by going back to the main lender and asking for a further advance. This can take time to be processed and will be based on your financial situation.
And they could say no.
You could look to remortgage to a completely new lender but this tends to take 8 weeks or so to go through.
So a second charge bridging loan is often used because it is fast, and the eligibility criteria is more flexible than a main mortgage.
Yes, the interest rate is more expensive but the lender is taking more of a risk.
These lenders move fast, so it’s possible to have funds in your bank account within a week or two.
Interested in a chat?
Bridging loans for chain breaks
The origins of bridging style loans in the UK were apparent in the 1960’s.
These loans were used to assist bank customers when a delay occurred with the sale (or completion) of their main residence. By borrowing against the equity in their home, and moving this money to the new property as a deposit, enabled customers to complete on their next home.
The bridge was repaid when the main house sale went through.
This remains one of the most popular reasons for taking out a bridge loan.
Are second charge bridging loans regulated?
Second charge bridging loans for a residential property that you or a family member will live in will be regulated by the FCA (Financial Conduct Authority). So a chainbreaker loan would need to be regulated.
Conversely, a bridge loan taken out purely for property investment or for purchasing a commercial property would be unregulated.
Some lenders only work in the unregulated loan space, so you will need the assistance of a broker to seek out the best regulated provider for your needs.
Read more: Are bridging loans regulated by the FCA?
Bridging
Eligibility
While the specific criteria will vary between lenders and scenarios, here are the typical requirements you’ll need to meet to qualify for a 2nd charge bridging loan:
Sufficient Equity
The property you’re using as security must have enough equity to cover the loan amount. Lenders typically offer loans up to a certain percentage of the property’s value, known as the Loan-to-Value (LTV) ratio.
Clear Exit Plan
You’ll need to demonstrate a viable plan for repaying the loan within the agreed term. Common exit strategies include selling the property, refinancing to a longer-term mortgage, or using funds from another source, such as an inheritance or investment.
1st Lender Consent
If your property already has a mortgage or another loan secured against it, you’ll need to obtain consent from the first charge lender before taking out a second loan. This is to ensure they are aware of the additional borrowing and its potential impact on their security.
Other Criteria
Minimum age: usually 18 or 21.
Property location: some lenders may have restrictions on the types of properties or locations they lend on.
Credit history: while some lenders specialise in adverse credit, a good credit history can improve your chances of approval and may lead to better rates. We can source non-status bridging finance where the lender does not need a credit check.
Proof of income or affordability: this may be required, especially for regulated second charge bridging loans.
Interest Rates and Costs
The cost of a second charge bridging loan involves more than just the interest rate. It’s essential to factor in additional fees and potential expenses to get a clear picture of the overall cost.
Interest Rates
Bridging loans, including second charge ones, will have higher interest rates than traditional mortgages.
This is due to their short-term nature and the increased risk for the lender. Interest rates can vary significantly depending on the lender, the loan amount, the loan-to-value (LTV) ratio, the borrower’s creditworthiness, and the perceived risk of the loan.
Most rates are expressed monthly e.g. 0.55% per month.
Fees
Besides interest, you’ll likely encounter various fees, such as:
- Arrangement fees of 2% charged by the lender for setting up the loan.
- Exit fees, though becoming less common, payable when you repay the loan.
- Valuation fees to assess the property’s worth.
- Legal fees for both your solicitor and the lender’s.
Alternatives
While there are many different ways of borrowing money, there’s no real alternative to bridging finance when you need money fast.
Yes, you might be able to remortgage and capital raise but this will take 6-8 weeks.
Yes, you might be able to get a secured loan but this could take 4 weeks.
Taking out bridging finance does mean paying a bit more in interest and fees. In return, you get fast decisions and cash in the bank within 7-10 days.
How a broker can help
The world of second charge bridging loans is confusing, with many different lenders and options available.
And that’s if you’re able to find any to look at.
The truth is that bridging lenders like working with specialist brokers and intermediaries. They don’t need to advertise in the same way that a major bank would.
They build relationships with expert brokers.
These experts can make sure the right lender gets matched to the right borrower.
Brokers work with many lenders, including some you can’t find on your own. This means they can find you the best deal.
Brokers understand bridging loans and can assist you at every stage. They’ll explain your options, check if you qualify, and help you create a plan to repay the loan.
Brokers do the hard work for you. They’ll compare lenders, discuss loan terms, and handle the paperwork, so you can focus on other things.
Brokers know what lenders are looking for. They can help you present your application in the best light, even if you’ve had credit issues in the past.
