Second Charge Bridge Finance
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Second Charge Bridge Finance
Explaining second-charge bridge finance with Scott West.
What is a second-charge bridging loan and how does it work?
A second charge bridging loan is identical to a first charge bridge in how it functions and how fit’s set up. The difference is in how the lender secures their legal charge.
Normally on a home, the first-charge lender is your primary mortgage lender. With first charge, they get first rights to the property in the event of repossession. They get their money first, basically.
A second-charge lender sits behind them. As the name suggests, they’re second in line for their money. So the risk is slightly higher to a lender, but the purpose of the bridging loan is the same to the client.
What can second charge bridging loans be used for? When would you use or need a second charge bridging loan?
Usually we would now explain regulated and unregulated bridging, but in the case of a second-charge bridge it could be either.
If you were doing it on a Buy to Let or something you don’t plan to live in, it would typically be unregulated. In this scenario, perhaps you’ve got a Buy to Let lender as your first charge, but you want to do some more work to the property before it’s due for refinance. So you borrow some more money against it on a second charge bridge.
That would be one example. You could also use it to release capital to buy another property, if there’s enough equity. Basically you could use it for any real estate purpose.
But you could also use a second-charge bridge against your home. If the purpose is for business, most lenders will consider that to be unregulated, which gives you the benefit of being able to have a 24-month term. With a regulated bridging loan, you would be limited to 12 months.
If there’s a lot of equity in your main residence, it can sometimes be sensible to use the Bridging Loan against that property. It allows you to get a lot more equity out for what you want to do. But, of course, that’s then going to put your home at risk should you default on the loan.
Who is a second charge bridging loan for?
Virtually anybody looking to raise further finance. As always, bridging loans are much faster than term loans. So if speed is the primary goal, then consider a bridging loan. We couldsecure it against any assets you have. If they already have loans against them, we structure it with a second charge.
Do you need consent for a second charge?
Yes, we will need consent from most lenders, but this isn’t very onerous. It’s simply your solicitor writing off to get consent. It’s pretty straightforward to do that.
A few lenders don’t require it and a very small group will not give consent – but most will and it’s straightforward. It’s just a bit of paperwork.
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How much can you borrow with a second charge?
It depends on the lender, the asset and what type it is. A lender is going to give you more Loan to Value if the property is of good standard, in a good location and sellable.
A 65% Loan to Value is typical, but not absolute. If you’re looking for 70%, 75%, or even 80%, that property needs to be in a very good area. There also needs to be a clear, defined exit route for a higher Loan to Value. But it could be done.
It’s really circumstantial, depending on what the client needs – because the more you borrow, the higher the cost. There’s always that to bear in mind.
How long does it take to put a second charge on a property?
It’s very similar to standard bridging. I would say it could be done as quickly as two weeks. I did a bridging loan just this week that completed in 14 working days. It could be done very quickly.
I like to tell people to give me more time than that, just because there’s always something unexpected. There’s always one question that pops up. So aim for four weeks and if we can do better, we will.
What are the advantages and disadvantages of a second-charge bridging loan?
The advantages are that it allows you to release capital from property without having to refinance the entire loan. If you have a cheap mortgage in the first place, for example, it doesn’t make sense to refinance the entire property.
The second charge bridging loan allows you to get the capital out and only pay an expensive rate on the small amount you’re borrowing. But that then leads to the disadvantage that you now have a second charge on a property and we need to exit at some point.
More often than not, that’s through refinancing either the main property or other properties in your portfolio. So while it could be cheaper on the initial structure, you might need to refinance that cheap mortgage anyway to repay the bridging loan.
It’s great upfront if you need quick money for tax bills or new property refurbishments. The disadvantage is we do need to refinance that at some point – so you need to know where that money is going to come from.
How do I apply for a second-charge bridging loan? How does that work?
Firstly, speak to a broker. We’re here to give you guidance and some of the initial figures. We’ll give you a quick overview of how the structure would look, what we can and can’t do, and the Loan to Value we could achieve for you.
If you’re looking to proceed, we’ll talk to a few lenders, get some terms together and present back to you all the details. From there we’ll run the paperwork, the legal valuations and take as much of that process off your hands as we can.
If you want to know more about bridging, we have some other podcasts on bridging as a whole, regulated and unregulated.
The main thing is to be mindful of that repayment vehicle and how it is going to work. While it’s fantastic to be able to get the equity out of homes that have fixed mortgages on them, we do have to really think about the most cost effective way of repaying that loan back without detrimentally impacting yields across the rest of the portfolio. But we’ll have that conversation with you upfront.
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