What is the Difference Between a First Charge Bridging Loan and a second charge Bridging Loan?

A Bridging Loan is a flexible form of short term funding that’s quick to arrange. As the name suggests they are used to “bridge the gap” and access finance  swiftly whilst waiting on funds from other sources. They can be used from periods of a few weeks up to 24 months. They are secured loans, and are registered as either first charge or second charge on property or assets you already own. But what is the difference between a first charge bridging loan and a second charge bridging loan? 

In this blog post we are going to take a look at first charge bridging loans, and second charge bridging loans. Setting out the differences of first charge and second charge. Also considering when and how a first or second charge bridging loan would be used. So, hopefully if you are considering taking out some short term bridging finance you have a better understanding of which would be the best option for you. 

Why use a bridging loan ?

If you need to access funds quickly a bridging loan can be the ideal solution. They can be arranged swiftly and with minimal hassle. They are secured as either first or second charge against an existing property, and repayments on the loan are generally only due at the end of the term.

What is a First Charge Bridging Loan?

A first charge bridging loan is where the loan applied for will be the only one secured against your property or assets. A first charge bridging loan means that the loan provider will be the “first Charge”. This first charge lender would be the first to be repaid from the sale of your property should you fail to repay the loan. Only once this first charge has been settled could any second or subsequent charges be recouped.

What is a Second Charge Bridging Loan?

A second charge bridging loan occurs when there is already a mortgage or loan secured against property. Effectively the bridging loan provider is “second charge” meaning they can only be repaid once the first charge debt has been discharged. Lenders generally prefer to be first charge, hence second charge bridging loans can come with more stringent approval criteria, and potentially higher interest rates.

What are the differences between first charge and second charge bridging loans ?

On the surface there is very little difference on how these first charge and second charge loans work. They are both short term loans which need to be repaid with interest at the end of a fixed term. However second charge loans offer a greater risk to the lender, hence most bridging loan providers prefer to be first charge. This does not mean that you can’t apply for a second charge bridging loan. Below are factors you need to consider when applying for a second charge bridging loan.

Interest Rates: As we mentioned earlier a second charge comes with a higher risk to the lender, and this can be reflected in higher interest rates than would be applied to a first charge loan. 

Lending Criteria: It could be that you can’t borrow as much for a second charge, as the amount of debt outstanding on the first charge will be deducted from the overall amount you can borrow. The amount of remaining equity you have available together with the value of your property will determine the amount  you can borrow with a second charge loan.

Consent of Existing Lender: The first charge lender has to consent to the second charge being applied to the property. Some first charge lenders will not allow a second charge being levied against property that they already hold as security.

Repayment Options: These could be more limited with a second charge loan.

Why Take Out a Second Charge Bridging Loan?

After consideration of the above, there are occasions when a second charge loan can suit your needs. It could be you want to complete a property before you have sold your own,  need access to cash for business ventures, buy an investment property, or to pay off debts.

 A second charge bridging loan allows you to use the equity within your existing property to achieve these goals. Short bridging finance  gives you quick  access to funds, without the need to change or amend any existing  first charge loans or mortgages. 

What are the benefits of a second charge bridging loan?

There are number of benefits associated with second charge bridging loan

Increased Borrowing Potential: It allows you to release funds above those of your existing loan, in a simple straightforward way. 

Fast Access to Finance: It is a much quicker, and more straightforward way of raising funds than a remortgage. This means you can access your capital swiftly allowing you to have cash available when you need it.

Keep Existing Mortgage: A second charge runs in tandem with a first charge loan. Meaning you can stay with your existing lender if you prefer, or if you find your current lender won’t agree to release more funds you can look elsewhere without the hassle of having to fully remortgage.

Lending Criteria: A second charge loan company will consider the amount of equity in your property, and how you intend to repay the loan at the end of the term in deciding how much you can borrow. As opposed to a first charge lender who will primarily look at your income stream. 

This second charge method can be helpful to those who have irregular income or the self employed. As there are no monthly payments on a bridging loan, the second charge lender will focus on your exit strategy at the end of the loan term. 

Bad Credit: As mentioned above, it is the repayment of the loan that second charge lenders consider. Hence it is the equity available to them that is important rather than regular repayment. Whilst it’s not without risk, a second charge loan could be considered for those who have a poor credit rating. Allowing them access to funds.

Unlike taking out a second mortgage which tends to be taken out over a relatively long term a second charge bridging loan is a short term method of borrowing. This means it can be repaid more quickly allowing the borrower to reduce debt.

So, whether you are looking for an investment that is time sensitive such as an auction purchase, are in need of funding but don’t want to impact your existing mortgage or you are unlikely to meet the criteria for more traditional funding then bridging finance offers you a good alternative. 

 

If you are interested in finding out more about bridging finance the team here at Pyxis will be only too happy to take you through the options available to you. With many years experience and access to a large panel of specialist lenders our team is the perfect choice for all your first and second charge bridging loans.