Let’s say that you have a first charge bridging loan and you have also completed a second charge bridging loan -you may not even know that a third charge bridging loan also exists.
This is because third charge bridging loans are becoming increasingly rare to find, but third charge loans are out there if you qualify. But what exactly are third charge bridging loans?
A third charge bridging loan is a type of bridging finance that is available to qualifying applicants with first and second charge loans already in place. A third charge bridging loan works like a second charge, but third charge lenders will have to wait to reclaim after the first two loans settle.
As with many aspects of bridging finance, this can all be quite confusing thanks to the various particulars of each type of bridging loan.
Third charge loans are also a bit difficult to come by, but can be worthwhile for those needing to pay off a mortgage or secure even more finance for various projects or needs.
In this guide, we are going to take a closer look at third charge bridging loans and tell you everything there is to know about this loan type.
What are bridging loans charges?
In bridging finance, bridging loans are short term forms of finance with interest rates along the higher end of the spectrum. This is to reflect the associated risks that may or may not arise based on the collateral assessed for the stop gap solution.
Within bridging finance, there are three types of loans that are all scaled in descending order from first, second, to the lesser-utilised third charge bridging loans.
Most borrowers will typically stop at the first charge, and a good deal of borrowers may also feel that a second charge is beneficial.
Essentially, the needs for acquiring a bridging loan are typically for situations where certain properties may not be readily mortgageable by a mortgage lender wishing to finance with a buyer or, acquiring bridging finance may arise in a situation where you are looking to pull your cash back out or refinance.
You can find out more about exactly how bridging finance works here.
With that in mind, let’s take a closer look at exactly what the three types of loans are and what they entail.
In the UK, bridging loans tend to revolve around the first charge stage only. The most primary example of a 1st bridging loan would be the acquisition of a property or the acquisition of a loan to renovate or remodel the home.
Another example of a first charge loan would be if you took out the loan to pay off your mortgage, and then you would just be left with the repayment of the first charge loan.
For a second charge bridging finance loan – and this type of loan is also common – this type is utilised when there is already some sort of financial arrangement in place with a property, typically a mortgage.
The loan is known as a second charge bridging arrangement because this is the second financial arrangement in place for the property in question.
3rd charge bridging finance
Third charge bridging finance is something that bridging finance providers are typically wary of approving, but as long as your qualifications and eligibility requirements line up, you are likely to get approval.
A third charge loan is essentially the exact same process as seen with a second charge, however, the lender for the third charge loan, if given, will have to wait until the first and second charges have settled before they can reclaim their loan amount.
Third charge providers may also look away from the property itself depending on the amount you request to find collateral that would satisfy any risk involved.
Those with adverse credit or other debts that may have contributed to a low credit score or less than stellar credit rating, may also benefit from some of the protocols commonly used in 3rd charge bridging.
You can read more about this situation or other debts and how this relates to 3rd charge bridging here, Bridging Loans For Adverse Credit.
How do bridging loan charges work?
When you apply and get approved for bridging, the lender then places what are known as ‘charges’ against the property or collateral that is used to secure the loan.
You will need to think carefully before securing a bridging loan since your property will be given to the lender if you cannot repay the loan.
That is why safety measures related to eligibility criteria are in place during the application process to ensure the lender will at the very least receive something back that is worth the price of the loan.
This is also regulated by various charges, which we discussed above. A bridge loan is not just a one and done type of financial equity, you can borrow further if needed.
For example, let’s say that you already have a mortgage in place but you want to settle the mortgage first to do with the property you like.
In this case, you can apply for a bridge loan and this will be a second charge since the mortgage in place is already the main finance against the property. If the bridge loan is approved, you can pay off the mortgage and now you are just left with a first charge bridge loan to pay back.
A second and third charge bridge loan can be used for a variety of different needs, but lenders may be wary of taking the risk.
We can connect you with brokers who specialise in second and third charge bridge loans.
What’s the difference between first, second and third charges?
Now that we know exactly what the various types of bridging loans there are, let’s take a look at exactly how each one differs.
First Charge Bridging Loan
The first charge can be a bit confusing, because it can mean a number of different things based on the particular arrangement.
If you have a first charge loan, you can also simultaneously get a second charge loan. But in the instance that is likely to pay off a mortgage, the paying off of the mortgage would then create a first charge bridge loan.
With the second and third charge loans, you would first need to have a first charge bridge loan.
Second Charge Bridging Loan
The second charge bridge loan will come in as second place after the first charge debt, and will take priority before the third charge bridge loan can be repaid. A second charge cannot be satisfied until the first charge has been fully settled.
Third Charge Bridging Loans
Third charge bridging finance is the last of the loans on the totem pole of priority. Third charge arrangements cannot be settled until the first and second charges clear.
If a third charge is granted on a collateral other than the property attached to the first and second charge, this is a bit different, and the loan can be settled accordingly irrespective of the first two loans.
What are third charge bridging loans used for?
There are a wide range of different uses for a third charge bridge loan. But you must prepare yourself for the possibility that lenders may not want to get involved with a property that already has a first and second charge loan on it.
With that in mind, something different may be presented and offered for collateral and you will have to ensure that you have a perfect exit strategy in place. Even then, you still may get turned down for this rare loan.
Many borrowers typically seek a 3rd charge bridge loan for instances where they may need to release capital and/or the borrower cannot get extensions on the previous loans. Therefore, seeking to apply for yet another bridge loan is likely the best option, and this can help avoid the very high interest rates that could come from applying for a personal loan.
Essentially, borrowers typically have a matter arise that calls for a third charge bridge loan, and it is much easier to keep the financials all in one purview by maintaining the bridging repayments instead of taking on an entirely new loan from an outside, personal lender.
How to secure a third charge bridging loan
Securing a third charge bridge loan is not going to be easy, but if you find the right firm that can offer bespoke advice and put you in touch with lenders who are willing and who regularly fulfil third charge bridge loans, it is certainly possible.
You should first ask yourself if a third charge is something that you can feasibly take on. It would be quite catastrophe to take on a third loan and something happens where you cannot pay back the loans.
Lenders know this full well, and repayments are always at the back of their mind when it comes to something as risky as a third charge bridge loan. But if you have a plan in place where repayment will go smoothly, you should definitely apply.
You would need to find a fully qualified lender that specialises in third charge bridge loans specifically or who has fulfilled third charge bridge loans in the past. Due to the risk, many lenders may only be willing to offer a third charge if it is non-regulated and has nothing to do with the property attached to the first two bridge loans.
If there is any first charge debt in place, the chances of getting a lender to agree to a third charge bridge loan is unlikely. The second and third charge loans will have to wait until you settle the first loan, and this is just not something lenders always feel comfortable doing.
Having a strong exit strategy in place will help most specialist lenders understand that you are serious about repayment and the transaction will go smoothly.
The good news is that we are able to connect you with a lender that specialises in second and third charge bridge loans, as long as your exit strategy and offer is worthwhile and fail safe.
Our brokers and lenders have access to the entire property development market, and are always on the lookout for borrowers who can further grow their business.
What is the criteria?
First and foremost, your exit strategy is likely going to be the deciding factor when it comes to securing a third charge bridge loan. This will show the lenders that you have a perfect plan in place and every single penny will be finalised and secured for repayment based on the plan you have in place.
The exit strategy could be the original mortgage being settled or a remortgage, the sale of the property outright – which will certainly satisfy all the loans in one fell swoop- and even some non-standard exit strategies such as inheritance or even endowments.
You will also need to ensure all the traditional criteria for acquiring a bridge loan are met. If you have bad credit, showing that you have an optional form of collateral, could also be a strong indicator for the lenders to take a risk on securing the third bridge loan as well.
Most lenders will be willing to accept something like renovation as a reason for a third charge, but you will need to prove to them that you can execute your renovation plans successfully and also prove how this could add value to the home or property in question.
A lender will be in the know about some setbacks, but you will need to be 100% honest about how every step of the process will work and how the plan will go so that there are no potential problems outside of predictable delays.
Why choose Bridging Options for Third Charge Bridging Loans
At Bridging Options, we provide bespoke and informative advice on all matters related to bridge loans for our clients. We can connect you to brokers and lenders who specialise in third charge bridge loans, and we can also offer advice if you need further information on how to proceed with something like a third charge bridge loan.