What is a Second Charge Bridging Loan?

Spotted a great investment property but falling short on the total funds? Looking for a short-term funding source for your business or funds to renovate a property to increase its value? But you have already secured a loan against your property. Do not worry. A second charge bridging loan can be a solution for you. 

A large number of people in need of extra funds are turning to second-charge loans to fulfil their financial needs, including the purchase or renovation of a property and injecting capital into the business. Almost all bridging lenders and some p2p lending platforms offer this type of loan. You can use such pans for almost any legal purpose, and your lender will not interfere as long as you are able to repay the loan amount. 

Here we are going to explain what a second charge bridging loan is and how it works. Keep reading to know more.

Second Charge Bridging Loan Explained

A second charge bridging loan is a short-term lending product that already has a mortgage against it. If there is enough equity left in the property, you can secure another loan against it.         

You can take out a second legal charge on all types of properties, including residential, commercial, buy-to-let and mix-use properties. Unlike traditional property loans or mortgages, it usually has loan terms of 12 months.

As second-charge debt sits behind the first-charge loan, you will always need to take permission from the first-charge lender before taking out a second-charge loan.in addition, it is more expensive than the first charge because of the additional risks to the finance provider. 

When Would Second Charge Loan Be Beneficial?   

A second charge bridging loan can be beneficial for you in different situations, some of which we are describing here: 

If You Are on Low Rate Mortgage 

A second charge bridging debt will help you keep your existing mortgage rate. There will be no change to the mortgage terms and interest rate. You can take out a second-charge loan to pay your mortgage instalments, and it allows you more flexible repayment terms that help you save thousands of pounds in interest. 

When You Are Unable to Secure Mainstream Loan

The rules for mortgages have become strict in the past couple of years. Mortgage lenders are applying a “stress” test to determine whether a borrower can afford to repay the loan amount in case the interest rate rises. However, second-charge lenders rely on something other than this type of test and offer tailored loans to meet the needs of individual borrowers. Second-charge bridging loans are also suitable for borrowers with low income or bad credit history who otherwise are not able to secure mainstream loans from banks.

When You Have Fixed Rate Mortgage With Early Repayment Charges  

If your mortgage loan has a term of large penalty for stopping or switching your mixed rate mortgage before the loan terms end, second-charge bridging finance can be a cheaper option. In this case, your mortgage loan stays in place, and you don’t need to pay any penalty. However, running a cost comparison in such a scenario is always better.

When you need Quick Funding

As you all know that a mainstream loan can take several months to complete the application process and release funds; bridging loan lenders usually take decisions within hours of initial enquiry. It means that with a second charge bridging finance; you can get quick access to funds. It can be a useful option for those looking for a quick cash injection.   

How Much Can You Borrow? 

Most bridging lenders offer a maximum of 70% loan to value. The loan amount usually ranges between £25,000 to £5m. The amount you can borrow depends on how much equity is left in the security property. The more equity you have in the property, the more you can borrow. You can get quick approval if you have a strong and acceptable exit strategy. 

How Much Will It Cost?    

The cost of the second charge bridging loan may vary from lender to lender and is usually made up of interest rate and set-up costs. 

The interest rate of second charge bridging finance starts from 0.69% per month to 0.75% per month. The lowest interest rates are reserved for low-risk borrowers. 

Other than the interest rate, the following are additional charges that you must consider before taking out a loan: 

Lender Arrangement Fees   

Bridging lenders charge this fee to set up the loan, and it usually ranges between 1-2% of the loan amount. They are often added to the loan amount if you want to do so. 

Exit Fees  

Not all bridging lenders charge exit fees; it is becoming less common. If any lender charges a thus fee, it is due when the loan is repaid. Typically, the exit fee is equivalent to 1 month’s interest, depending on the lender you choose and their fee structure.

Valuation Fees

You have to pay this fee early in the application process, and it can not be added to the loan amount. 

Legal Fees

When taking out second-charge loans from a bridging loan company, you are responsible for both your own and your lender’s legal fees. You have to pay this fee at the end of the application process. 

Conclusion

A second charge bridging loan is a quick funding option for those with an outstanding mortgage on their property. It sits behind the existing mortgage, and you can take it out if your property has sufficient equity. Bridging lenders offer flexibility in eligibility criteria and accept all types of property as security. You can use second charge bridging finance to purchase a property, fulfil business cash flow needs or renovation of a property. However, the interest rates of such loans are high, so it is always better to compare prices to find competitive interest rates.

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