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First, Second and Third Charge Bridging Loans

There are several different types of bridging finance available. Find out more information here.

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 25, 2021

There are several different types of bridging finance available and what’s best for you will depend on a number of factors.

In this article we look at first, second and third charge bridging loans, providing all of the key information you need to know to about them as well as revealing how to get the right advice about these products.

Once you’ve read through all the details below, if you’d like to speak with someone in more detail about the possibility of taking out a bridging loan, give us a call on 0808 189 2301 or make an enquiry and we will arrange for an expert bridging finance broker to get in touch.

What’s the difference between first, second and third charge bridging loans?

When you’re offered bridging finance, whether the capital is a first, second or third charge loan depends on whether you have any other finance on the security property, and the ‘charge’ type basically denotes which lender 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, the bridging loan will be classed as a second charge bridging loan, i.e. a secondary debt behind your mortgage. As your original mortgage is classed as the first charge debt, the mortgage lender 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

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.

A bridging loan would also be classed as a first charge debt if you were to use it to purchase a property outright, whether that’s a fixer-upper or a home you bought through auction. Bridging finance under these circumstances is usually settled by remortgaging or through the sale of the property.

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

Second charge bridging loans

As outlined above, a second charge bridging loan is defined as finance on a property which already has some form of secured (mortgage) lending currently in place and, therefore, takes priority in terms of repaying the debt. The bridging loan would be 2nd in the queue, so to speak.

3rd charge bridging loans

Third charge bridging finance is something you might seek if you already have 1st and 2nd charge loans against your property.

It works in much the same way as a 2nd charge bridge loan, except the 3rd 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 3rd charge loans, but that isn’t to say they’re impossible to find.

How to get a second charge bridging loan

The best way to get a second charge bridging loan is through a specialist bridging finance broker. Some lenders won’t offer finance under these circumstances as they consider it too risky, but there are specialist bridging finance providers – some of who can only be accessed through a broker – 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 second charge finance may be more willing to lend under these circumstances, providing other aspects of the deal are low risk.

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

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

The application process would be no different if you’re taking out a second-charge bridging loan compared to first-charge finance. You can read about what the process involves and what you’ll need for it in our complete guide to bridging loans.

Will applicants with bad credit be approved?

It should be noted that borrowers with adverse credit will struggle to land a 2nd charge bridging loan, especially if a remortgage is the exit strategy (as getting approval might be more difficult, depending on the scenario).

Moreover, 2nd 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 bridging finance lender who offers favourable 2nd charge bridging deals, even if you’ve had credit issues.

How to get a third charge bridging loan

Speaking to a broker who specialises in bridging finance is highly recommended as your first port of call. These deals are often complex, but with professional advice on yourself, it may be possible to find a lender with a high enough appetite for risk to take on your application.

Only a small minority of bridging finance lenders are happy to offer 3rd charge bridging loans, usually on a non-regulated basis (meaning that it is not secured against a property you currently live in). Even then, the overall deal would need to be extremely attractive to the lender, as the level of risk would often be considered high.

Given that so few lenders are offering 3rd charge bridging loans, having access to the whole of the market is vital to find a favourable deal. The advisors in our network who specialise in complex bridging finance agreements have exactly that and can help you find the right provider. They can also offer you bespoke advice, negotiate the most favourable rates on your behalf and help you with the paperwork.

The application process itself shouldn’t be any different for third-charge bridging, compared to first or second charge. See our guide to bridging finance for a complete rundown of the process and what you’ll need to complete it.

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Why the exit strategy so important

For any bridging 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 and third charge bridging loans are 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 having an offer on the table, if your plan is to sell up.

What is the best form of security for a 2nd or 3rd charge bridging loan?

The most appropriate, and acceptable, form of security for any form of bridging loan would be a property that is guaranteed to raise enough to settle the 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’re 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.

Speak to a bridging loans expert

Given that second and third charge bridging loans can be complicated and risky, professional guidance is highly recommended before you get started. Luckily, we work with bridging loan brokers who specialise in complex deals. They deal with second and third charge arrangements every day and have the exact knowledge and experience you need.

Through our free broker-matching service, you can be paired up with the ideal bridging finance advisor for your needed and circumstances. To get started, give us a call on 0808 189 2301 or make an enquiry so we can arrange a free, no-obligation consultation between you and them today.

FAQs

Will experience in property development help me?

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 secure the loan?

Again, it is possible because a large deposit will offset some of the increased risk a 2nd or 3rd charge bridging 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 approve 2nd or 3rd charge arrangements.

What other factors improve my chances of securing a 2nd or 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 either a 2nd or  3rd charge bridging loan if you meet the criteria outlined in the section above, so that means having a viable exit strategy, clean credit, good security and experience in the property market (if the loan is for development purposes).

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the 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 information 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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