Bridging loans can be a good funding solution for those who need quick access to funds. They usually have a simple and easy application process as compared to traditional mortgages. You can use such loans for any purpose, not just for purchasing a property. However, they have a higher interest rate than standard bank loans. Bridging lenders and peer to peer lending UK platforms are offering bridging finance. There are first, second and even third charge bridging loans, and you can choose one that suits your needs.
Here in this article, we are going to describe the characteristics of first and second-charge loans and how you can apply for one.
What Is A First Charge Bridging Loan?
First charge bridging finance is the primary loan that has priority over all the other loans. If a bridging loan is the only loan you secured against your property, it is called a first charge bridging loan. If you do not repay the loan amount, the first charge lender will repossess your property and get their loan amount back before a second charge lender.
What Is A Second Charge Loan?
You can take out a Bridging loan against a property that already has a mortgage or any other loan against it. This type of loan is known as a second-charge bridging loan. These loans always sit behind the first-charge loans. If you default on a loan, your second charge lender will be second in line to get their loan amount back. In addition, you need to take permission from the first charge lender before taking out a second charge loan.
How Does Second Charge Bridging Finance Work?
As we described above, a second charge loan is a loan secured against a property that already has an outstanding mortgage. It is a short-term source of funding and is usually used for home improvements such as renovations, conversions or extensions.
Most lenders are likely to lend from £25,000 upwards, depending on the equity you have in the property. The maximum loan-to-value is generally 70%.
It works in the same way as a standard bridging loan, where you need to make an application and go through an application process to get approval. Once you get the approval, you have to agree on payment terms with the lender to repay the loan amount within a short period.
Other than the interest rate, you have to pay additional fees such as loan arrangement fees, legal fees, valuation fees and exit fees, just like standard bridging finance. All these costs add to the loan amount, making it an expensive way of borrowing.
This funding option can be suitable for you if you have an existing loan on your property but still need quick funding to fulfil your financial obligations.
Difference Between First And Second Charge Bridging Loans
The type of charge on loan describes which lender takes priority over the repayment of the loan if a borrower defaults on payments. It means it will set out an order in which lenders can reclaim their money in case your property is repossessed.
The first charge lender will receive their funds first, then the second charge lender.
The most significant difference between these loans is that with the first charge bridging loan you need to have no mortgage already taken out on your property, so if you have an outstanding mortgage first charge loan would not be an option for you.
On the other hand, a second charge bridging loan can be used along with an existing mortgage or loan secured against your property. So, if you have a mortgage against your property but still need funds for the improvement, second charge bridging finance is the option for you.
How To Apply For First And Second Charge Bridging Loans?
If you want to take out a first-charge bridging loan, you have to choose a lender and make an online application. You need to provide all the necessary information so that it will not take a long time to assess. Once your loan is approved you will get money transferred to your bank account within the shortest possible time.
On the contrary, applying for a second-charge bridging loan can be challenging. Here are some simple steps that you can follow to make this process easier:
- Organise your paperwork. Although bridging loans have more flexible eligibility criteria than traditional mortgages, it can be very helpful to have all the required documents ready before you apply. It can also speed up the process. Most lenders need documentary evidence of proof of identity, proof of income, address, financial history and exit strategy. Some lenders may also require evidence of your experience in property development.
- Identify potential problems that can slow down your application process. When collecting documents, you may identify several problems that could reduce your chances of approval. For example, you may not have a large amount to use as an initial deposit, your credit score could be higher, or your exit strategy could be stronger. You should try to rectify these issues. Some of these issues may have little impact on your application, but your exit strategy is something that needs to be viable for a second or third-charge bridging loan.
- You can speak to a broker to make the process easier and find the right deal for you. It is because brokers have more knowledge and access to the whole market and help you find the loan according to your situation.
Can I Get a Second Charge Bridging Debt?
Second-charge bridging loans are now becoming common. Whether you can qualify for such a loan depends on the lender you choose because the criteria can differ for different lenders. The key factors that can determine your eligibility for second-charge bridging finance are:
How much equity is left in your property? Most bridging lenders allow a maximum of 65% LTV, so it can be challenging to secure a second-charge bridging loan if you need more equity. Another factor is the permission from your first charge lenders. There are only a few lenders who do not allow second-charge loans on properties with the first charge.
We hope this article will help you understand the difference between first-charge and second-charge bridging loans, and now you can make a better decision when choosing a funding option.