There are different types of bridging loans like First, Second and third Charge bridging loans, and you can take out one that suits your requirements. Typically these Bridging loans is used by property developers and investors to purchase a new home. It can help bridge the gap when you want to purchase one thing but wait for long-term finance to become available.
You can take a bridging loan to complete the purchase of property and can repay the loan amount after the sale of the existing property. However, short term bridging finance is much more flexible than the conventional mortgage, and you can use it for almost any legal purpose.
Bridging loans are short term finance that provides quick access to funds, and borrowers can fulfil their short term financial needs with it. In this article, we are going to describe the first, second and third charge bridging loans and how you can get them.
When you want to get bridging finance, either you are offered. First, second or third charge loan depends on whether you already have any finance on security property or not. The ‘charge’ represents the priority of repayment when a borrower defaults.
For example, if you take out a bridging loan on your residential property that already has a mortgage on it, your bridging loan will be the second charge bridging loan. It is a secondary loan behind your mortgage. Your mortgage is considered a first charge loan. Thus, the mortgage lender will get the priority in loan repayment in the case of repossession. Bridging loan lenders get their money back from the remaining equity.
A bridging loan is considered a first charge bridging loan when you take it out to purchase a property outright from the auction or property market. Secondly, if you take a bridging loan to pay your mortgage loan, your bridging loan will become the first charge loan after the mortgage payment.
In such cases bridging loans are settled by selling the property or remortgaging. The charge can be placed on the property you are going to purchase or your property on sale as a security against the loan.
As we described above, a second charge bridging loan is when you already have a loan secured against a property. Therefore, the priorities in terms of loan repayment are changed. The bridging finance will be second in the queue in the event of repossession.
If you want to take a second charge bridging loan, the best way is to go to a bridging finance broker. Unfortunately, not all lenders offer this type of loan because lenders consider it too risky. However, there is specialist bridging finance providers, and you can access them through a broker. The lender approves or rejects your loan application based on the viability of the deal.
Each loan application is accessed individually, and borrowers are willing to pay a second charge loan to those who have low risks in other aspects of the deal. For example, lenders are likely to offer loans to the borrowers who have:
1. A valuable property to use as security against the loan
2. Good Credit Score
3. A strong exit strategy
4. A healthy deposit
5. Experience in property development
The application process of a second charge loan is not much different from the application process of first charge finance.
If you take out a 2nd charge bridging loan, it can offer several benefits. Some of which are as follows:
1. A second charge bridging loan offers more flexible repayment terms compared to your existing mortgage terms. You can also save thousands of pounds in interest.
2. If you are locked in a condition of paying early repayment charges of your existing mortgage, a second charge loan can be cheaper as your existing mortgage remains in place, and you do not need to pay any penalty.
3. Second charge bridging loan is available for borrowers who are self-employed or have unusual income structures.
4. It can take a long time to approve when you want to take out a property loan from a bank. Whereas bridging loan companies usually take decisions within hours.
You should keep in mind that it will be difficult for you to secure a second charge bridging loan if you have a bad credit score. Especially when remortgaging is your exit strategy, getting loan approval becomes more difficult. Although most 2nd charge bridging loans come with high-interest rates, it does not mean that you can not find a deal with the best rates.
As long as you have a viable exit strategy, your credit score can not affect the approval of your loan application. If you shop around and research the market, you can easily find lenders who are likely to pay a second charge loan even if you have bad credit.
The third charge bridging loan is when you already have first and second charge loans in place and are still looking to take out a bridging loan. In this case, the bridging loan provider will be third in the queue to get his money back.
This type of loan carries more risk that in case a borrower defaults, there are chances of losing money. It is a reason that lenders avoid granting the third charge bridging loan, and if they provide, it has a high-interest rate.
It is highly recommended to speak to a specialist broker if you want to take out a third charge bridging loan. Although getting such a loan is very complex, with the help of financial advisors, it is possible to find a lender who has enough risk appetite to accept your loan application.
Only a small number of bridging loan lenders offer third charge bridging loans. Most 3rd charge loans are non-regulated, and you can not use a property as a security in which you are currently living. There is a huge risk associated with this type of loan. Your deal will need to be extremely attractive for the lender if you want quick approval.
A 3rd charge bridging loan is usually used to release capital. It is because they are mostly used for properties that are already encumbered. Taking out a 3rd charge loan can be cheaper than extending your existing loan.
No matter a few lenders are offering third charge finance, you should explore the whole market to find the best deal for you. You can also use online comparison sites like shortterm to find the best bridging loan provider without wasting your time and energy. The application of all types of bridging loans is similar in which you have to fill an application form to provide the required information and exit strategy.
To secure any type of bridging loan, either a first, second or third charge loan, you must provide a strong exit strategy. An exit strategy is a plan of how you will repay the loan amount. The decision of the lender mainly depends on whether your exit strategy convinces him or not.
Typically, when a loan is taken to purchase property, the exit strategy is the sale of a property or a remortgage. However, some lenders also accept non-standard exit strategies that may include the use of endowments and investments to repay the loan.
Second and third charge bridging finance has high risk compared to first charge bridging loans. That is why you need a strong exit strategy to secure this type of loan.
The most suitable and appropriate form of security against any type of bridging loan is a high-value property So that the lender has an assurance that the loan amount will be repaid by remortgaging or the sale of the property. Moreover, you have to provide evidence to the lender that your property is remortgage-able or sell-able.
Suppose your exit strategy is the sale of a property. In that case, the lender will look at the location of the property and other factors that can affect the sale of property, such as non-standard construction and leasehold.
If you are planning to renovate your property, your bridging loan providers will like to see whether you are capable of working on your plans or if there are any chances of delays. Furthermore, the lender may also want to know how you will finance the project.
As the 2nd and 3rd charge bridging loans carry more risks for the lenders, there are fewer chances of approval. However, there are some ways that you can follow to increase the chances of securing such loans.
1. If you are able to pay an extra deposit or security, the chances of risks will be reduced to some extent. And the lender will be more willing to grant a loan to you.
2. You can also get fast approval if you use a high-value property as a security against the loan.
3. You will also get a better chance to secure a 2nd or 3rd charge bridging loan if you meet the lending criteria. Generally, the lending criteria include a viable exit strategy, property to use as collateral and clean credit.
The amount you can borrow varies from lender to lender. Usually, you can get up to 70% of the value of the property you are using as security. You can lend anything between £30,000 to £50 million. The amount you can take out depends on the value of your property. If you are able to provide extra security, some lenders allow you to borrow 100% LTV.
No doubt, a bridging loan can be an excellent short term debt that you can use to fulfil your financial requirements. It also offers flexibility in repayment terms, and you can take it as a 2nd or 3rd charge loan.
However, you should keep in mind that it can be much more expensive than a traditional mortgage. Other than that, you have to pay fees such as origination fee, broker fee or administration fee that make borrowing costs high.
Therefore, it is always better to check all the charges associated with a bridging loan before taking out a loan so that you can decide whether you can afford this type of loan or not. You can also explore alternative options to find the best financing source for yourself.
As we all know that second and third charge bridging loans are risky and complicated. We recommend you take expert advice before getting into this type of loan. Fortunately, there are a number of bridging loan brokers who specialize in arranging 2nd and third charge loans for you.
They connect you with lenders with enough risk appetite and accept 2nd and 3rd charge loan applications. Such brokers deal daily with 2nd and 3rd charge loans and can provide you with the knowledge you need.
We hope that now you understand the difference between the first, second and third charge bridging loan UK. It will help you in making an informed decision about which type of loan will be best for you.