Bridging loans are an ideal tool if you need to unlock money from your property. Perhaps you want to access funds to purchase an investment property or maybe you need to resolve a pressing creditor issue and don’t have the cash flow to pay the debt in time?
There are many reasons why people decide to opt for a bridging loan, but what is meant by the terms first charge and second charge bridging loan?
First charge bridging loan
A first charge bridging loan is the primary loan secured against a property. This loan takes precedence over any other finance secured against the property.
First charge bridging loans can potentially be offered to higher maximum loan to values (LTVs) than any subsequent charges but when the LTV on a first charge mortgage or loan is low it opens up the possibility of a second charge bridge.
By granting a first charge against their property the borrower gives the lender the right to repossess and sell their property to repay the loan if repayment terms are not adhered to. First charge loans can only be secured against properties with no other loans secured against them.
Such properties are referred to as unencumbered. They are a popular choice for borrowers who have time restrictions and need to release liquidity in order to take advantage of a time limited opportunity or to resolve an emergency creditor situation.
Second charge bridging loan
Second charge bridging loans can be obtained if the mortgaged property still has sufficient equity value left/the LTV is low enough for a lender to consider offering a second charge loan.
The second charge bridge loan is considered secondary in priority when compared with a first charge loan. In the event that the borrower defaults and the first charge holder repossesses the property the first charge lender will recover their monies first.
The second charge lender will only be able to recover their outstanding debt when the debt owing to the first charge lender have been repaid.
Whilst the second charge lender has equal rights to instigate possession proceedings in the event the client defaults on their loan, they still have to ensure the first charge lender is redeemed in full upon sale of the security property before they can apportion any remaining funds to settle their own debt.
The greater risk and typically higher LTVs of second charge bridge loans is reflected in their pricing. They are usually more expensive than first charge loans.
Second charge bridging loans can be particularly useful in situations where redeeming the existing first charge might incur large redemption penalties or the existing first charge lender is looking to materially increase the rate applied to a new larger first charge loan.
Still unsure & need advice? Why not consult an expert?
Central Bridging are bespoke bridging loan specialists. They are a principal lender offering a range of loan facilities for business use from £250K to £2.5M over periods from 3 to 24 months. Their loans are secured on freehold property across England and Wales. Call 03332 400 506 for a friendly chat.