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First, second and third charge bridging loans

Looking for information about 1st, 2nd and 3rd charge bridging? Get the right advice here.

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By Pete Mugleston   Mortgage Advisor

Last updated: 23rd November 2018 *

There are several different types of bridging finance available, and here we’ve explored first, second and third charge loans and provided the key info you need to know about them.

The following topics are covered below…

First and second charge bridging loans

When you’re offered bridging finance, whether the capital is a first or second charge loan depends on whether you have any other finance secured on the property or not, and the ‘charge’ type basically denotes who has priority of repayment if you default.

For example, if you take out a bridging loan on your main residence that already has a mortgage in place, this is essentially a second mortgage.

As your original mortgage is a 1st charge debt secured against the property, the bridging finance you’re applying for would be a 2nd charge bridging loan on your current home.

Your mortgage would take priority for repayment in the event of repossession, and the bridging loan would be repaid from any remaining equity.

First charge bridging finance explained

So, what exactly is a first charge bridging loan? Well, to stick with the same example, if you took out bridging finance to pay off your existing mortgage, the mortgage itself would be settled, leaving just the bridging loan in place, which would therefore be a first charge, secured against your home.

Charges can be placed on the property you want to buy, the property you’re selling, or both.

How first charge bridging loans work

Most bridging loans, whether they first, second or third charges, are offered on a short-term interest only basis. Rates and fees can be high, but they’re usually faster to arrange than mortgages and can be more flexible, since much of the lending criteria hinges on the viability of exit strategy, i.e. how the debt will be repaid at the end of the term, and not really on a borrower’s ability to meet repayments like a traditional mortgage. These exit strategies can vary, but are commonly through a remortgage or the sale of a property.

Can I get a second charge bridging loan?

Some lenders will not offer bridging finance as a second charge loan, but there are specialist providers out there who will consider it, depending on the viability of the deal.

All bridging loan applications are assessed on a case-by-case basis and lenders who consider 2nd charge may be more willing to lend under these circumstances if other aspects of the deal are low risk.

For instance, bridging providers prefer applicants to have the following…

  • A strong exit strategy
  • Clean credit
  • A good security property that’s likely to be a sound investment
  • Experience in property development (if the loan is for this purpose)
  • A healthy deposit

Why exit strategy is important

For any bridge loan application you will need to prove you have a viable exit strategy as lending decisions often come down to whether the provider is convinced the investment will yield enough capital to settle up at the end of term.

In most cases where there’s property or land involved, the exit strategy is usually a remortgage or the sale of the property but some lenders are open to “non-standard” exit methods, such as using investments, endowments or inheritance to settle the loan.

Second charge bridging finance is considered higher risk than first, so you’ll need a water-tight exit to offset this risk. Providing a deal in principle if your exit is a remortgage may be essential, and it always helps if you have an offer on the table, if your plan is to sell up.

Can I get a 2nd charge bridging loan with bad credit?

It should be noted that borrowers with adverse credit will struggle to land a second charge bridging loan, especially if a remortgage is the exit strategy (as getting approval might be more difficult, depending on the scenario).

Moreover, second charge bridging loans in general tend to come with less favourable rates, but that isn’t to say finding the right deal for you is impossible.

As long as you have a viable exit plan and your adverse credit is unlikely to put it in jeopardy, the advisors we work with might be able to pair you up with a lender who offers favourable 2nd charge bridging deals, even if you’ve had credit issues.

What makes a good security property?

Put simply, a good security property is one that is guaranteed to raise enough to settle the bridging debt through a remortgage or sale at the end of the term.

The lender will be keen for you to evidence that the property is sell-able or remortgage-able.

If the former is the exit strategy, they will look at its location and whether there are factors that might put off prospective buyers, such as leaseholds or non-standard construction.

If you’re planning to renovate an uninhabited property, the lender will be keen to see that you are capable of pulling off your plans, and will be mindful of the possibility of setbacks and delays, and will also want to know how the works will be financed.

Will experience in property development help me get a 2nd charge bridge loan?

It certainly won’t hurt your chances as applicants who can evidence past experience in property development/investment are considered lower risk by most lenders.

If it’s a complex development project, some lenders may insist on experience in property and might ask to see examples of your previous projects, but that isn’t to say it’s impossible to secure bridging finance with no experience whatsoever.

Will a larger deposit help me get a 2nd charge bridge loan?

Again, it is possible because a large deposit will offset some of the increased risk a 2nd change bridge loan involves.

Most bridging loans are offered with a loan to value ratio (LTV) of 70-75%, a figure which can drop to between 50% and 60% for high-risk deals.

But if you’re able to stump up extra deposit or security elsewhere (perhaps on another property or a valuable asset), the lender will likely view the deal as safer, offer more favourable interest rates and consider 2nd charge arrangements.

What are 3rd charge bridging loans?

Third charge bridging finance is something you might seek if you already have first and second charge loans against your property.

It works in much the same way as a second charge bridge loan, except the third charge lender will be at the back of the queue when it comes to reclaiming the debt and may have to look at other ways of recouping it.

With this level of risk in mind, bridging finance providers are wary of third charge loans, but that isn’t to say they’re impossible to find.

So, can I get a 3rd charge bridging loan?

Only a small minority of lenders are happy to offer third charge bridging loans, usually on a non-regulated basis (meaning that it is not lent on a property you currently live in, which would be regulated), and even then, the overall deal has to be extremely attractive to them.

What will improve my chances of securing a 3rd charge bridging loan?

Your likelihood of securing capital may increase with some providers if the loan amount is substantial or the property is of high value, as the potential rewards might be worth the risk, from the lender’s perspective.

You’ll also stand a better chance of approval for a third charge loan if you meet the criteria outlined in the section above, so that means having a viable exit strategy, clean credit, a good security property and experience in the property market (if the loan is for development purposes).

How to get a 3rd charge bridging loan

Given that so few lenders are offering third charge bridging loans, having access to the whole of the market is vital to find a favourable deal. The advisors we work with have exactly that and can help you find the right provider if you make an enquiry.

Speak to a bridging loans expert

To get the right advice for you, or if you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the bridging finance broker with the right expertise for your personal circumstances. We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 23rd November 2018
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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