What is a Second Charge Bridging Loan?
Second charge bridging loans allow borrowers to raise money based upon the difference in the value of the property they own and the outstanding balance on the mortgage secured on that property. The difference is referred to as “equity”.
For example, if you own a building which is worth £500,000 and the value of the outstanding mortgage (and any other loans secured against the property) is £250,000, then you have accrued £250,000 in equity during your ownership of the building.
A second charge bridging loan gives you access to that equity subject to a second charge bridging loan lender’s loan-to-value requirements.
For example, good brokers can usually fund up to 70% LTV of a property. 70% of £500,000 is £350,000. If you subtract the value of the mortgage (£250,000) from the maximum LTV (£350,000), this leaves £100,000 – the maximum amount you’ll be permitted to borrow.
On rare occasions, a first charge holder may not allow a second charge to be taken on property. In these cases, we advise that you allow your lender to register an equitable charge on the property although this may mean that the interest rate will likely be higher.
Why do people and companies take out a second charge bridging loan?
Most second charge bridging loans are taken out to fund:
- investment property purchases
- the renovation or extension of existing primary residential property (regulated bridging loans)
For second charge bridging loans required not for the purpose of purchasing and/or developing land or property, the most frequently occurring reasons for opening a facility are:
- clearance of tax liabilities owed to HMRC,
- debt consolidation,
- investment opportunities,
- prevention of bankruptcy,
- probate issues,
- re-bridging (the replacement of a bridging loan whose term is about to expire with a new bridging loan),
- repayment of arrears to creditors, and
- working capital for business.
What is a second charge regulated bridging loan?
Many homeowners take out second charge bridging loans on their primary residential property. This is normally to fund major home improvements like an extension or a loft conversion.
Because the bridging loan is secured against their primary residential property, it’s often referred to as a “regulated limited payment second charge bridging loan” and it’s governed by the Financial Conduct Authority.
Paying a second charge bridging loan back
At the end of the duration of a second charge bridging loan, the lender will expect to be paid back in full.
Your application for a second charge bridging loan must have an exit plan contained in it for it to be approved.
The most common acceptable exit plans for lenders include:
- the sale of the property on which the second charge is secured
- re-financing on the property secured (for example, a secured loan or a new mortgage on primary residential property which has been extended or renovated)
- expected revenue (for example, payment to you or your company of an invoice)
- proceeds from an inheritance
- maturing of an insurance policy
- the sale of another property or asset of value owned by you or your business