Second charge bridging loans explained

Two bridges

When you have finance secured against a property, such as a bridging loan or a commercial mortgage, lenders take ‘charge’ over the asset they have financed.

‘Charge’ refers to the priority given to lenders in the event that more than one loan is secured against a property. The lender who has first charge will be given initial priority over the property should the borrower default on the loan. After the first charge loan is paid off, the remaining equity (if there is any) is assigned to lenders with second and subsequent charges.

The first charge loan on a property will usually, but not always, be a mortgage. Second and subsequent charge loans are of significantly greater risk to a lender because there is no guarantee – particularly in the case of repossession – that the full equity will be realised at sale.

What use are second charge bridging loans?

Second charge bridging loans are typically used for capital-raising purposes where repaying the original first charge loan with a new, higher-LTV loan would result in a higher interest rate or early redemption penalties.

Say, for instance, that you own half of the equity outright in a commercial property worth £1 million, and the remaining half is funded by a £500,000 commercial mortgage. If you wanted to release some of this equity, you would have two options:

1. Remortgage to a first charge loan

By remortgaging to a new first charge loan at 75% LTV, you could release up to £250,000 equity without needing a deposit:

  • 75% of £1 million – £750,000
  • First charge commercial mortgage to be repaid – £500,000
  • Equity that can be released – £250,000

2. Take out a second charge loan without repaying the existing mortgage

Though commercial mortgages and bridging loans are available at up to 75% LTV (or higher in some circumstances), the encumbrance for a property with a second charge mortgage (the proportion of it that is funded rather than owned outright) will be restricted to 65% LTV. Taking out a second charge loan, therefore, would allow you to release up to £150,000:

  • 65% of £1,000,000 – £650,000
  • Current equity – £500,000
  • Equity that can be released – £150,000

The interest rate on a second charge loan will invariably be higher due to the increased risk to the lender. However, consider that in the second scenario, the loan is far smaller. If you would invite a higher rate of interest by switching out of your loan early, as in scenario one above, it might be beneficial to consider the second charge loan:

Original repayments

  • Interest charged on £500,000 at 0.65% – £3,250 per month

Scenario one (75% remortgage)

  • Interest charged on £750,000 at 0.75% – £5,625 per month

Scenario two (second charge bridging loan)

  • Interest charged on £500,000 at 0.65% – £3,250 per month
  • Interest charged on £150,000 at 1.50% – £2,250 per month
  • Total monthly repayment – £5,500 per month

In this example, repaying two separate loans at a combined LTV of 65% is cheaper than repaying one loan at an LTV of 75%, even though the interest rate on the second charge loan is double that of the original commercial mortgage. Unless you needed to raise more than £150,000 and did not have access to the funds elsewhere, the second option would be the most prudent; particularly if you were locked into the first mortgage and would incur charges for redeeming it early.

Remember that your bridging advisor is on hand, and will take full account of your needs and circumstances before recommending the best course of action.

Repaying your second charge bridging loan

Second charge bridging loans typically last no longer than 12 months, after which time they must be repaid. If this will not be with the sale or refinancing of the property, you will need to ensure that you have another repayment strategy in place – see our article, Types of bridging loan, for more information on open and closed bridging loans.

If you are considering applying for first or second charge bridging or commercial finance today, don’t hesitate to get in touch or request a free quote below.

This information should not be interpreted as financial advice. Bridging loan rates are subject to change. Speak to our advisors for a loan illustration.

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