What’s the difference?
The term ‘charge’ refers to the priority lenders have over your property. A ‘first charge’ is the primary loan secured against your property. As the primary loan, the ‘first charge’ will take precedence over any other finance secured against the asset. However, you may have sufficient equity in your property to take out a ‘second charge’—so this is an option to consider if you need to raise more capital.
What is a first charge bridging loan used for?
A first charge bridging loan can be used if you have an unencumbered property or asset. A first charge could be used for residential property purchases, i.e. to purchase a new property before your current home has sold.
A first charge bridging loan could also be used for time sensitive situations, such as funding a purchase at auction.
What is a second charge bridging loan used for?
Second charge bridging loans are usually used to raise funds against an asset in situations where remortgaging your first charge loan is an undesirable option. There are a number of reasons you may not wish to remortgage; taking out additional capital could result in a higher loan to value, raising your interest rate. You may also be in a fixed-term period, wherein remortgaging will subject you to your lender’s early repayment charges (ERCs). A second charge bridging loan may therefore be necessary if you need to arrange finance quickly, without adjustment to your first charge.
What does a second charge entail?
Second and subsequent charges are understandably a higher risk to the lender, as their charge does not take priority should you default. As such, the interest rate on your second charge will usually be higher. However, second charges are usually for a smaller loan size than your first charge because the maximum loan to value (LTV) is capped at a smaller percentage.
The most financially viable path for you will therefore depend on your personal circumstances and your current financial situation.
How long can I get a second charge bridging loan for?
A second charge mortgage will generally be for a term of no longer than a year, although in some circumstances this could be extended. It is essential you can demonstrate what your exit strategy for the loan will be.