Second and Third Charge Bridging Loans
Read on to find out what are first, second and third charge bridging loans, and which may best suited for your needs
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Bridging loans can be a good option for those who want quick access to finance. They usually have a faster application process than traditional mortgages and don’t necessarily have to be used to purchase a property. They do, however, also attract higher interest rates.
There are first, second and third charge bridging loans, one of which may be suitable for your needs. We identify their characteristics here, how to apply for one, which lenders offer them, and more.
What are second and third charge bridging loans?
Second charge bridging loans are a form of financing when you already have a loan secured against the asset. As a result, the second charge loan provider has second priority over the lender of the first loan. A good example is if you were to take out a bridging loan against a home or property for which you already have a mortgage – the mortgage would be a first charge debt, and the bridging a second.
Third charge bridging loans are when you already have two other loans secured against an asset. In the case of a property, you could have a mortgage on it and a secured loan already. If you take out another loan secured against it, that’s your third charge. As with the second charge loan, it takes less priority to the first loan and then also the second.
Third charge bridging loans are difficult to apply for successfully. If you manage to secure one, you may find that the rates are very high and the other terms are exceptionally strict – an area a specialist bridging finance broker could offer advice.
Both types can be used for a variety of purposes, have short terms (usually around 12 months) and don’t always need monthly repayments.
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How are they different to first charge?
First charge loans are always repaid first, to the lender that granted the original loan, in the unfortunate event of a default. However, first charge loans also differ from second and third charge for several reasons:
- Rates: The rates you could be offered for either second or third charge loans are likely to be higher than first charge loans. The reason being is that providers need to offset the perceived increased risk.
- Exit strategy: If your first loan is a mortgage, you will not have needed an exit strategy for your application. In comparison, your second or third charge bridging loan application will need a viable exit strategy to be considered.
They prove how you plan to repay the loan once the term has ended. When it comes to properties or land, you could plan to remortgage, but sometimes it is possible to use other methods for repayment – for example, inheritance or investments.
- Credit: First charge loan providers are usually flexible in their approach to applications as long as the exit strategy is sound. As a result, first charge applicants can have black marks on their credit score and still be approved.
Second and third charge bridging loans are seen as much higher risk than first. As a result, applicants will often need a clean bill of health for their credit history, especially if credit problems would put the exit strategy in doubt.
- Deposit: The higher the deposit, the more likely you are to be approved – and with better terms. When it comes to loan to value (LTV) and second/third charge loans, the ratio can drop significantly if the loan is perceived to be very high risk. With the first charge, you may be able to secure a loan with a 25% deposit. For second and third, you may require a deposit closer to 40-50%.
- Security: Assets can be used to secure this form of financing and strengthen your application. Given the higher risk of second and third charge loans, the quality of those assets will be more closely scrutinised than for a first charge loan. For example, if your asset is a property, lenders may be more specific about its location and property type. The more sellable it is, or the more equity you have in the property, the lower the perceived risk.
All these factors can make applications a more complex process. Talking to a broker who specialises in bridging finance can help as they will know which providers are most likely to accept your application – improving your chances of approval and securing a more favourable rate.
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How to get a second or third bridging loan
As applying for this form of financing is challenging, there are several things you can do to make the entire process easier and improve your chances of a successful application.
- Organise your paperwork. Bridging loans may have less rigid eligibility criteria than conventional mortgages, but it can be very helpful to get the right documents together before you apply. Plus, it can speed up the process too. The majority of lenders will want documentary evidence such as your proof of identity, address, and other financial data – such as bank statements, proof of income, etc. to support your application and strengthen it. Without doubt though, you need to write your exit strategy. Ensure that you have any supporting documents detailing how you plan to repay the loan too. It can be very helpful to have evidence of your experience if you are looking for a bridging loan for development work. Or, if the loan is for commercial purposes, provide your business plan and any evidence of your previous commercial work will help.
- Identify potential problems in your application. In collating your paperwork, you may have identified problems that could affect your chances of approval. For example, your deposit may not be high enough, your credit score may be lower than you thought, or your exit strategy may not be as viable as you once believed. Now is the time to try to rectify those issues. Some may not be deal-breakers, but your exit strategy is something that will need to be watertight for second or third-charge bridging.
- Speak with a broker. Given the number of variables and factors that bridging loan providers consider in the application process, speaking with a broker can be time well spent. They can advise you on the best providers for your situation, thus improving your chances of approval. For instance, if you have a low deposit, they may know the lenders which are more likely to accept your application. Importantly, they will also know the providers who will offer you the most favourable rates, considering your situation, so they can save you money.
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Which lenders offer these loans?
Several lenders offer second charge bridging loans, some of whom may also offer the more difficult to access third charge loans. Some examples of second charge bridging loan providers are:
- MT Finance
- West One Loans
This list is not exhaustive by any means, and while the market is smaller for bridging loans providers than with mortgage lenders, there may be other providers that you could consider. This is where seeking expert advice can be so beneficial. Not all lenders will be suitable for you depending on the rates they offer and their own specific eligibility criteria.
Get matched with a bridging finance broker
Second and third charge bridging loans are difficult to access. The market is complex, given each provider’s highly variable eligibility criteria. The bridging loan advisors we work with can help as they know the market inside out, so they will be able to direct you on which providers are suitable for your needs and guide you through the entire process.
Plus, as bridging loans tend to attract high interest rates, experienced brokers can help identify the providers that will extend you the most favourable terms – saving you money.
Our no-fee no-obligation broker matching service connects you with one of our vetted advisors who has in-depth knowledge of the market. Call 0808 189 2301 or enquire with us today so we can put you in touch with a bridging loan specialist immediately and set up a free, no-obligation chat.
Sometimes. Regulated bridging loans are loans secured against a property which is occupied (or will be occupied) by the borrower or someone from the borrower’s family. This type of loan can be either first or second charge. The regulator is the Financial Conduct Authority and the loan will be subject to the rules for conventional mortgages.
An unregulated second charge loan is if a property (used as the security for the loan) is not lived in by the borrower or borrower’s family. They tend to be more flexible as their criteria is not as closely regulated.
Yes. If you already have a loan, to be eligible for a second charge loan secured against the same asset, you need to have the initial lender’s go ahead.
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