Second Charge Bridging Finance
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Second Charge Bridging Finance
Rohit Kohli talks to us about second charge bridging loans.
What is a second charge bridging loan and how does it work?
Essentially, it’s a short-term loan secured against your property – where you already have a mortgage on it. Your mortgage is a first charge, and the second charge is a second loan or mortgage you’re taking.
The existing mortgage lender has the first charge, which gives them priority if the property is sold. Bridging lenders tend to take the second charge, which means they get repaid after the first lender.
It works as a quick way to release equity without disturbing your main mortgage, and avoiding any penalties on your main mortgage if you’re fixed or locked in.
What can second charge bridging loans be used for? When would you use a second charge bridging loan?
Let’s say you’ve got a mortgage already on your property – that’s called your first charge.
You might be locked into a fixed rate, but you need to release some funds for a project, maybe purchasing a second property or an investment property.
You want to finance that from the equity in your property. That’s where the second charge comes in. You would use it to release further equity on top of that mortgage.
People often think that a second charge is only used for property purchases. A lot of people talk about this when buying properties at auction – taking a bridging facility because it’s relatively quick to organise compared to a normal mortgage. But it can actually be used for a wide range of different short-term funding needs.
Bridging is for a short period, and not long-term like a mortgage. You can use it to buy another property, refurbish one or complete a development that you’ve got on the go.
Some people might use it to clear debts or tax bills on a short-term basis, if they know they’ve got other finance coming in soon but need to clear those debts now. It can also help a business’ cash flow if needed. It’s mainly used where you need speed and flexibility at any cost – because, being short-term lending, it is quite expensive.
Who is a second charge bridging loan for? Can anyone get a second charge bridging loan?
In the right circumstances, yes. Lenders will assess your circumstances and look at the proposition in front of them. People assume that it’s only for buying property to rent out or redevelop.
In the right circumstances, however, homeowners who already have a mortgage and need some short-term funding could potentially get a second-charge bridging loan, as well.
You have to have enough equity in your property. The lenders will look at how much your existing mortgage is compared to the value of your property, how much you want to borrow on top and where that takes the equity to.
It’s for people who don’t want to redeem their first charge mortgage. If you’re fixed into a mortgage rate and the early repayment charges make remortgaging too expensive, short-term bridging finance may be an option for you. It’s for those who need short-term funding quickly – and have a plan to exit, as well.
Do you need consent for a second charge?
Yes, absolutely. If you already have a mortgage on your property, your current lender will need to give consent for the second charge to be placed on the property.
In some circumstances, an existing lender will refuse that. It may be in the terms and conditions that a second charge can’t go on the property, or they might feel there’s not enough equity in the property to warrant the second charge.
If you do get a refusal, you may need to consider alternatives – such as refinancing that existing mortgage and paying any early repayment charges. You can’t just apply for the second charge without telling your current lender.
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How much can you borrow with a second charge?
It all depends on your circumstances, the property value, how much equity you have, the property and the proposition being put in place. A lot of second charge bridging finance is done on manual underwriting.
Lenders will assess things based on the information that’s in front of them, as well as the proposition. They may take a more pragmatic view or a more conservative view of the information they have. It depends on the circumstances.
Normally, there needs to be enough room in the property value to allow contingency for the lenders. You’ll often see it capped at 65% to 75% across both the charges on the property. Some lenders might be willing to push a little bit more for the right deal.
What’s crucial is your exit strategy. You have to have that in place before you apply. We’ll talk to you about what that exit strategy looks like and how that will play out. The lender will definitely want to see evidence of that exit strategy.
How long does it take to put a second charge on a property?
Clients often think that bridging is almost instant. It is faster than a standard mortgage in most cases, but there are still legal hurdles to work through.
Usually it can take two to six weeks, depending on the lender. The biggest delay is normally getting consent from your first charge lender, as it can take a bit of time to go through their processes and the legal paperwork. It can be quicker – we’ve seen it done in a matter of days, but only if all the documents and consents are already in place.
What are the advantages and disadvantages of a second charge bridging loan?
The main advantage is that it gives you quicker access to funds compared to a normal mortgage. It keeps your main mortgage untouched – which helps particularly if you’ve got penalties on that. If it makes sense cost-wise not to pay the penalties, a second charge may be a good option.
It has more flexible uses compared to a normal mortgage. It can be used to invest in property or development or other non-property needs, as we touched on before. It’s a short-term solution for urgent requirements.
In terms of disadvantages, you’ve got to think about the cost. Bridging loans have higher interest rates, and the fees are much higher than a standard mortgage because of the risk to the lender.
There is also a higher risk of repossession if repayments aren’t made on time. The consent from your first lender can cause delays and there’s no way of telling how long that could take. Normally it’s done within a reasonable timeframe, but delays could impact your project or your plans.
The biggest thing is that it is short-term only lending. It’s not a long-term fix and the exit strategy is crucial. It might be that you’re expecting some money to come in in the near future, or you’re waiting for the sale of a different asset. You need a robust exit strategy to avoid high penalties for missing the exit timelines.
How do I apply for a second charge bridging loan?
We often see people who think it’s like just taking out a personal loan – but it isn’t. It’s a lot more involved, especially with legal and valuation checks.
So speak to a broker like us. A lot of second charge bridging lenders only work with intermediaries, because it’s easier for them in standardising the information that’s needed and how it’s all done.
We’ll take all the information from you – your property details, value, existing mortgage details and the reason for the funds. We talk to you about your exit strategy and collect all the evidence we need from you, such as bank statements, credit reports, ID and income proof.
Then we do all the legwork. We’ll find the right lender to meet your scenario and talk to you about costs. We’ll then submit the application if you’re happy to go ahead, and follow it all through until you get your finances.
What else do we need to know about second charge bridging?
You can’t rush into second charge bridging financing. You need to consider it carefully. Explore how much it’s going to cost you versus a standard mortgage or other lending options.
It may seem more expensive, but it can be the right option for certain circumstances. We’ll work with you to assess that and talk to you about what could work best.
YOUR HOME IS AT RISK IF YOU FAIL TO KEEP UP PAYMENTS ON YOUR MORTGAGE OR ANY OTHER LOANS SECURED AGAINST IT.