Second Charge Bridging Loan: Key Facts and Insights

A second charge bridging loan can be a vital financial tool for small to medium-sized business owners.

In this blog, we will explore the key facts and insights about second charge bridging loans, including borrowing limits, loan terms, the distinction between first and second charges, and their application to commercial properties.

What is a second charge bridging loan?

A second charge bridging loan is a short-term financing option secured against a property that already has an existing mortgage or loan.

This type of loan allows business owners to access additional funds without refinancing their primary mortgage.

It is typically used to bridge the gap between a financial need and a more permanent funding solution, such as the sale of a property or securing long-term financing.

How does a second-charge bridging loan work?

A 2nd charge-bridging loan on a commercial property is a type of secured loan that ranks behind the first charge, typically the primary mortgage. Here’s a step-by-step outline of how it works:

1. Assess Equity: Ensure that there is enough equity in the commercial property mortgage to borrow against. The existing mortgage (first charge) and the potential second charge loan must be considered separately.
   
   
2. Find a Lender: Locate a specialist lender who offers second-charge loans for commercial properties.
   
   
3. Property Valuation and Borrower Assessment: The lender will evaluate the property's value and assess the borrower's credibility and ability to repay the loan.
   
   
4. Loan Offer: If approved, the borrower will receive a loan offer based on the available equity in the property. The loan is secured against the property, meaning the lender can repossess it if the loan is not repaid.
   
   
5. Repayment Priority: In the event of default, the first charge (primary mortgage) must be repaid before the second charge loan.
   
   
6. Usage of Funds: With a solid exit strategy and the means to repay the loan within the term, the borrower can use the funds from the second charge loan for various business purposes.
   
   
7. Repayment Terms: The term for repaying a second charge loan is typically shorter than traditional loans, often ranging from 12 to 18 months. Borrowers must factor in higher interest rates and additional fees, as these loans are generally more expensive monthly than a primary mortgage.
   
   
8. Repayment Methods: The loan can be repaid by selling the commercial property, selling another property, or refinancing.
   
   
9. Ongoing Mortgage Payments: While repaying the second charge loan, the borrower must continue making monthly payments on the existing mortgage separately.
   
   

How much can I borrow on a second charge?

The amount you can borrow on a second charge bridging loan in the UK depends on several factors, including the value of your commercial property, the amount of equity you have in it, and the lender's specific criteria.

Typically, lenders will allow you to borrow up to 70-75% of the property's value, taking into account the outstanding balance of your first charge mortgage.

For instance, if your commercial property is valued at £1,000,000 and you have an existing mortgage of £500,000, you may be able to borrow up to an additional £250,000 to £350,000, depending on the lender's terms.

However, the exact amount can vary based on the lender's risk assessment, your creditworthiness, and the purpose of the loan.

Is a bridging loan normally a first charge?

A bridging loan can be either a first charge or a second charge, but it is not necessarily one or the other by default. However, the most common application is a first-charge loan.

To learn more about bridging loans and their role in business finance, read our guide, UK Bridging Loan Insights: Everything You Must Know.

Examples of second charge bridging loans being used in the UK:

Small UK Business - Expanding Business Premises:

• A small business owner owns a retail shop valued at £150,000.
• They take out a second charge bridging loan of £30,000 to fund the expansion into an adjacent space.
• The expansion is expected to increase annual revenue by £50,000.

Sole Trader - Equipment Purchase:

• A sole trader operates a mobile catering business and owns a home valued at £200,000.
• They secure a second charge bridging loan of £20,000 to purchase a new food truck.
• The new truck is projected to increase their annual earnings by £40,000.

Property Developer - Land Purchase for Development:

• A property developer owns a portfolio valued at £500,000.
• They need a 2nd charge bridging loan of £100,000 to purchase additional land.
• The land will be developed into residential units with an anticipated sale value of £1,000,000.
  
  

How can I find the best Rates and Fees?

If you're concerned about finding the best available rates, fees and processing speeds out of all of the available providers, then you're in the right place already.

Finance Nation is your trusted broker, committed to finding the perfect finance lender for you.

Our cutting-edge Fintech platform ensures seamless access to finance solutions that suit your needs.

Contact us now to discuss your financial needs and your next best steps forward!

FAQ

Navigating the complexities of second charge bridging loans can be challenging. This FAQ aims to clarify some of the most common questions business owners might have.

Are second charge bridging loans a good investment?

Borrowers should think about how the borrowed funds will be utilised and ensure that the expected benefits outweigh the higher interest rates and fees associated with this type of financing.

What is the typical interest rate for a second charge bridging loan?

Interest rates for second charge bridging loans are generally higher than traditional mortgages, often ranging from 0.5% to 1.5% per month.

What are the eligibility criteria for a second charge bridging loan?

Eligibility criteria typically include having enough equity in the property, a good credit history, and a viable exit strategy for repaying the loan.

How quickly can I access funds from a second charge bridging loan?

Funds can often be accessed within 2-4 weeks, subject to property valuation and lender approval processes.

Can a second charge bridging loan be used to buy another property?

Yes, the funds from a second charge bridging loan can be used to purchase additional property, among other business needs.

What are the alternatives to Second Charge Bridging Loans?

There are a number of other financing options available to individuals and businesses. Some of these include business loans, secured loans, and unsecured loans. Additionally, borrowers may be able to look into a remortgage or equity release.

Are there any additional fees associated with second charge bridging loans?

Yes, additional fees may include valuation fees, legal fees, and lender arrangement fees, which can impact the overall cost of borrowing.

Is credit history important for securing a second charge bridging loan?

Yes, while flexibility exists, lenders will assess your credit history to determine your ability to repay the loan.

What happens if I fail to repay the second charge bridging loan?

If you default on the loan, the lender can repossess the property, but the first charge mortgage must be settled before the second charge loan.