Second Charge Bridging Loans UK
Second Charge Bridging Loans UK
This page looks at all your big questions about second-charge bridging loans, including when to use a second-charge bridging loan, how to get a second-charge bridging loan, and tips on the application process.
What Is A Second Charge Bridging Loan?
A second-charge bridging loan could be the right solution if you already have a mortgage secured against your property and need to obtain additional funds over a short period.
This type of loan may be preferable to remortgageing your property and having a first-charge bridging loan. Bridging finance is much more expensive than a long-term mortgage, and the best option would likely be to keep your existing mortgage and just pay the higher rate on the second bridging charge.
Another reason to take out a second charge, a second mortgage, homeowner loan, or second charge mortgage would be to avoid early redemption charges or early repayment charges (ERCs) that may apply to your current mortgage if you were to remortgage.
The funds raised are typically used to redevelop a property you already own, expand a business, or purchase an investment property.
With bridging loan second charges and all forms of property finance, you are offering your home as security and will be required to sign a legal charge.
How Do Second Charge Bridging Loans Work?
The loan is usually arranged over 12 months, and any lender will want to know how you intend to repay the loan at the end or before the 12-month period. This is called the “exit” strategy. The exit needs to be clear and realistic. The most popular exits are:
The sale of the property on which the lender has a charge/mortgage. The property must be marketed for a realistic sale price because if you do not redeem the loan within 12 months, there will be a renewal fee to pay. If the property is not sold or there has been very little interest from buyers, the lender will ask you to market the property for less to try and ensure a quick sale.
Ultimately, at the end of the 12 months, if the lender can see no sign of the property selling, they may take possession of it and offer it at a considerably lower asking price to ensure it is sold without further delay.
To refinance the bridging loan to a long-term second mortgage. The type of property will depend on the type of mortgage needed, i.e., a residential mortgage, a buy-to-let mortgage, or a commercial mortgage.
The refinance option works well where the bridging and long-term lenders are the same.
Other options that a few lenders may consider include the sale of secondary property, the sale of shares, or investments. The mortgage lender must be comfortable that the security offered is genuinely liquid.
Occasionally, a specialist bridging lender may consider inheritance as an exit strategy. However, the lender would want sight of the will, probate documents, and confirmation from a solicitor on likely time scales.
Options 1 and 2 are much more acceptable to most lenders.
With most bridging loans, you do not make monthly repayments. Instead, you borrow the interest, or the interest is added each month. If the interest is added to the loan at the beginning and you repay the loan in full before the end of the term, you will receive a refund of the unused interest.
How To Get A Second Charge Bridging Loan
The best way to get flexible second-charge bridging loans is to approach a specialist finance broker who understands the market and has a good network of reputable contacts. When looking to raise short-term finance, such as 2nd charge bridging loans, the lenders will often look at applications on a case-by-case basis.
Rather than find bridging lenders yourself, it makes sense for you to work with a broker who understands each lender's criteria and nuances. For example, one lender may offer better interest rates when the security is a buy-to-let property, or the property is located in London.
A good broker will determine the amount you can borrow, the loan terms, and if releasing funds is likely in the available timeframe.
A broker will know which lenders are prepared to lend to applicants who have adverse credit and those lenders who prefer commercial properties as security.
If you apply for a second charge bridging loan, your broker will provide an illustration highlighting the costs and fees payable. It will show the name of the second charge lender, the loan amount, arrangement fee, interest rate, term of the loan, solicitors fees, redemption fees, etc.
Tips To Help Your Second Charge Bridging Loan Application
A second charge bridging loan is typically needed because you want the funds quickly. To assist in a quick completion, here are some tips that can speed up the process:
Provide as much information as you can to your broker at the earliest opportunity, making it clear when you need the funds:
This could include the address and purchase price of the property you want to buy. Any other security you could offer to a lender, such as a buy-to-let property you already own.
Find out if you need to get any planning permission for any proposed works you may want to carry out on the property you are purchasing.
If you plan on developing the property, getting detailed quotes for the work you intend to do is wise. Getting 2 or 3 quotes would be sensible to ensure you're getting a competitive price.
Establish if your current lender needs to consent for a second charge to be registered against the property. This process can take 10-14 days or more, so it’s good to know whether this is required immediately.
Arrange a valuation of the property you are purchasing as quickly as possible. The valuation process could take 2 - 3 weeks, so booking this as soon as possible is good.
Provide your broker with proof of your identity, for example, a passport. Also, provide evidence of where you live, which could be a bank statement dated within the last three months.
For more information about second-charge bridging loans, contact our expert team today.