Second Charge Bridge Finance
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Second Charge Bridge Finance
What is a second charge bridging loan and how does it work?
It’s just like any other bridging loan. A bridging loan is a short-term loan secured on property, and used for all sorts of different reasons. It could be for investment purposes, which is probably the most common reason for short-term finance.
It could help you improve a property or buy a home before you’ve sold one. Just like a normal mortgage, there are first and second charges.
The first charge is to the lender you went to first. Let’s say you’ve got a mortgage on a property with a standard mortgage lender like NatWest. If for some reason we need an extra loan secured on that property, the lender we go to next will fall in behind the first lender, with a second charge.
It means that if the property is repossessed – although hopefully not – the first charge lender would get their money back first: in this case, NatWest. The second charge lender, the bridging lender, would then get their money back, and any money left after that is yours.
That’s why it’s slightly more risky for the second charge lender, because if the property loses value for whatever reason, there might only be enough money to pay off the first charge lender. The second charge lender would then be struggling to get their money back.
When would you use a second charge bridging loan?
There are a few scenarios. If we think about residential first, a common scenario is where someone finds a property they want to buy but they haven’t sold the house they live in yet.
They want to do things one at a time: buy the property, make sure it goes through and then sell. Or the new property might need a lot of work and they don’t want to move out of their current home while that’s done.
What we could do there is take a bridging loan to purchase the new property. It depends how much equity you’ve got, but a bridging loan could be secured over two properties or even three or more. If you live in property A and property B is the new one, you could take a bridging loan for the value of property B, secured on property B.
We can’t borrow 100% of a property’s value just secured on that one property, so we’d also secure it on property A. If you’ve got a mortgage already on property A, the bridging loan lender is going to take a second charge on property A. So it’s a first charge on property B and a second charge on property A.
Can you use a bridging loan for investment properties?
Yes. I’ve been talking to someone literally today, getting figures to buy three properties altogether to convert into flats.
We’re borrowing the money to do that, but we’re a little bit short on the deposit. There’s a residential property in the background with lots of equity, so we’re securing some bridging finance on that residential property as a second charge.
They want to borrow about a million pounds for these three properties all together. Around 70% is secured on the properties themselves, and the rest will be secured on the main residence.
Another scenario is that you have an investment property that you’ve got a mortgage on now, but it’s really run down. You need to do some work to it, then you’ll sell it. A bridging loan might be the right way to do that for such a short period of time, because if you take a normal mortgage you’re tied in.
Also, if it’s run down, you might not be able to get a normal mortgage on it. To borrow money to do it up, we might need a bridging loan as a second charge to do that.
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Who is a second-charge bridging loan for?
Anyone could take a bridging loan. There’s nothing stopping anyone doing it, although it’s not always the right thing. Some bridging loans are expensive. But if it’s an investment where you know what you’re doing, that could well be the only way of making it work.
Sometimes there are other mortgage options we could use to avoid a bridging loan. You’ll pay quite a lot on a bridging loan, which is worth it if it’s a decent investment, but this is for the property you live in, there might be something else we could do instead.
Do you need consent for a second charge?
Your first charge lender will need to allow a second charge of any sort. Some lenders are a bit funny about doing that. For example, Santander could have concerns about consenting to it. They will under certain circumstances, but not all lenders will allow the second charge.
They want to make sure there’s enough equity for them. We don’t tend to have too much of an issue, but they do need to agree.
How much can you borrow with a second charge?
Bridging loans are very rarely about your income – it’s more about your exit strategy and how you’re going to repay the loan at the end of the term, or before. That’s usually either refinancing or sale.
It’s not so much about your income. It’s more about how much equity we’ve got left in the property. If the property is going to be sold or refinanced, we still need some equity in it, so we can’t tend to borrow more than around 75% or 70% of a property’s value. That’s more important than how much you earn in defining how much you could borrow.
How long does it take to put a second charge on a property?
Usually not long. It’s a legal process, which depends on the first charge lender giving their consent, but it’s not overly complex. It’s not something that we need to allow months for.
What are the advantages and disadvantages of a second charge bridging loan?
It’s more about necessity, really. If you’ve got a project in mind or something you want to do, you might need to do a second charge. You wouldn’t just do it on a whim.
If you need to make something work, it might be the only way of doing that. That’s the advantage.
The disadvantage is that bridging loans are often quite expensive. There are other options that might be better for you. But often with a bridging loan, we do it because we need to. If we could utilise the second charge as part of that, then great. It usually allows a project to go through that might otherwise not.
How do I apply for a second charge bridging loan?
Just come to me and we’ll do it for you. With bridging finance it’s all quite bespoke. Different lenders do different things, so it’s important to go to a lender that will allow you to do what you want to do.
So come to a mortgage broker – and in this instance, one that’s a commercial broker as well. We’ll take care of everything, find a lender and make it all work.
In terms of the actual application process, we tend to do an initial application that’s a bit like an Agreement in Principle, where we send details of the project, the property and you to the lender.
If they’re happy, the application process starts. We get it agreed and do a valuation on the properties involved. Then there’s a legal process as well. It sounds long-winded, but it could be done very quickly. There are certain stages to it, so having a broker at your side is key.
Bridging finance is often a very good way of making investment projects work that otherwise wouldn’t. As long as you’re prepared for the costs, that’s all fine and all good.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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