What Are 2nd Charge Bridging Loans?
A second charge bridging loan, also known as a second charge mortgage, can be used as a solution for when you already have finance in place secured against a property, but additional funds are still needed.
Why is this necessary you may ask?
Because in property investment, there are always new opportunities and circumstances presenting themselves. For example, a second charge can be used to take advantage of these as well as to raise funds for refurbishment works on a property, to cover a shortfall of funds, or a new business venture.
Additionally, second charge loans can be used for a range of property types like residential, buy-to-let, commercial, or semi-commercial properties.
Furthermore, second charge loans are available for overseas clients and limited or offshore companies who are looking to purchase property within England and Wales.
At Bridging Options, we strive to offer these convenient services to our clients. Read on to find out more about this invaluable opportunity.
How Do Second Charge Bridging Loans Work?
When you first lend against a property, with either traditional long-term finance such as a mortgage or alternative finance such as a bridging loan, this is known as a first charge.
When or if you require additional funding, a second charge is provided, meaning there are two lenders with charges on the property.
This increases the loan to value percentage. Which mean you may therefore find the interest rate to be slightly higher for a second charge than the first charge.
But what circumstances may bring this need about?
When to use second charge loans
Second charge mortgage
Subject to the permission of your current lender, you are allowed to have a second mortgage secured on your home. These are popularly known as a secured loan, but most primarily as a second charge mortgage.
The reasons you may take out a second charge loan are typically because customers approach their existing lender for borrowing money. Examples of this may include debt consolidation, or some home improvements.
Sometimes, customers may be declined for any further advance, but that is not necessarily the end of the road just because the first mortgage lender says no.
If it’s a small amount of money, you would likely look at unsecured personal loans as an option. But if a larger amount is needed, typically in excess of 20,000 pounds or more, then a second charge mortgage may be the more sensible option.
Additional reasons that you may do a second charge mortgage could be due to a credit rating, which may have changed in between taking out the first mortgage, and then coming to apply for a second charge mortgage.
For example, if you got a first mortgage with a High Street lender, and then unfortunately you perhaps lost your job, and you end up with a default or a County Court Judgement on your credit rating profile, that could be a strong primary reason why you may be declined.
Whatever the reason, it would be a shame to move your entire mortgage into a specialist lender and be faced with a much higher rate of interest and early repayment fees.
Which is why this is one of the primary reasons that a second charge mortgage has come into its own, because you are able then to retain the really attractive rate you have with the High Street lender and then borrow the extra money you need through second mortgage.
Some other options may include when you’re looking to raise funds to refurbish your property before you sell, as well as a business transaction that may have come up which would generate a profit and funds are required to move quickly.
Furthermore, another reason could be that urgent funding is needed for an unrelated issue such as paying probate or associated inheritance tax costs.
Second charge loan criteria
Second charge mortgage criteria follows many protocols as established by HMRC.
The maximum second mortgage you can get depends on the amount of equity you’ve built up in your home .
A second mortgage allows you to use any equity you have in your property as security against another loan.
As previously mentioned, it means you’ll have two mortgages on your property.
Equity is the percentage of your property owned outright by you, which is the value of the home minus any mortgage(s) owed on it.
The amount a lender will allow you to borrow will vary. However, up to 75% of the equity in your property will give you an idea. Lenders have to comply with rules that cover affordable lending.
This means lenders have to carry out the same affordability checks and ‘stress test’ their ability to meet future mortgage monthly repayments as they would for an applicant for a main or first charge residential mortgage.
Second charge loan interest rates
The fees and interest rates when you take out a second charge mortgage tend to be much higher than a normal first charge mortgage deal.
The reason for this is fairly simple. It’s all about the risk of repossession.
So if you fall into arrears, and unfortunately the property ended up being repossessed, the first secured loan lender would have first call on that property once it’s sold to get their money back. The second mortgage lender can only come along and collect when the first charge mortgage fees have been met.
This is why it is higher risk for the second mortgage provider.
For example, if you borrowed £18,000 over a period of 120 months, you would likely face an interest rate of 5.5% fixed with a 60 month loan term in addition to broker and lender fees.
The benefits of a second charge bridging loan
Taking out a second charge loan secured by a reputable lender can be a great way to raise money fast for more money to satisfy personal circumstances with your home.
Although the interest is higher than what you can expect to see with first charge mortgages, these secured loans have very flexible lending criteria and are not as concerned with something like a bad credit rating, financial difficulties, or even how much equity was reconciled by the primary mortgage.
Taking out a second mortgage in tandem with the current mortgage can also mean that the need to repay your existing mortgage company is not as immediate, which can help you save on early repayment charges just by taking out the second mortgage.
These loans may be available where your existing mortgage provider is not comfortable lending. This is because income details are not required where the exit strategy is sale of the property.
Of course, this type of lending is a short-term option and should only be considered where a solid exit strategy is in place.
Why choose Bridging Options?
At Bridging Options, we know how hard it can be when you have an existing mortgage from a mortgage lender and may need to also consider taking out a second charge mortgage.
We regularly help clients with this issue, and strive to find ways to help those facing the prospect of securing financial services beyond an already existing mortgage.
For more information on second charge mortgage loans, rates and monthly repayments in several options, and how an open, new secured loan can help you, contact us for an informal chat and a free, no obligation quote.
Experts in bridging loans, our friendly financial specialists are available for you to call or contact online today for expert advice.