What is a second or third charge bridging loan and how does it work?
Original Article by: Bridging Loan Directory
You already have a mortgage or another loan secured against a property.
A refurbishment needs finishing, another purchase needs funding or capital is tied up while you wait for a sale or refinance.
Replacing the existing loan may be expensive or unnecessary. Could another lender provide short-term finance without disturbing the borrowing already in place?
Sometimes.
A second or third charge bridging loan allows additional borrowing to be secured behind one or more existing lenders. Whether it works depends not only on the property’s value, but on the total borrowing, the order in which the lenders will be repaid and the proposed exit strategy.
What do first, second and third charges mean?
A legal charge gives a lender security over a property.The position of each charge normally determines the order in which secured lenders are repaid if the property is sold or the security has to be enforced.A first charge lender is normally repaid first. A second charge lender ranks behind the first, while a third charge lender ranks behind two existing charges.For example:
A mortgage lender holds the first charge.
A bridging lender provides another loan secured by a second charge.
A further lender subsequently takes a third charge.
A second charge bridging loan therefore leaves the existing first charge loan in place. A third charge bridging loan leaves two existing secured loans in place.
In England and Wales, registered charges generally rank in the order in which they are entered on the property register, unless an agreement or entry changes that priority. Further information is available from HM Land Registry.Scotland and Northern Ireland have different land-registration systems, so the position should be confirmed by a solicitor familiar with the relevant jurisdiction.
Why might someone use a second or third charge bridging loan?
A borrower may need to raise capital without replacing an existing mortgage or other secured facility.
The existing loan may have a competitive rate, a long remaining term or early repayment charges. It may also be unsuitable or impractical to refinance the whole amount for what is only a short-term requirement.
Possible uses include:
Completing a refurbishment or conversion
Funding development works
Raising a deposit for another property purchase
Buying a property before another asset is sold
Releasing capital into a property business
Meeting a short-term financial deadline
Covering a gap before longer-term finance becomes available
A second or third charge is not automatically appropriate simply because the property contains equity. The borrower still needs a clear reason for taking the loan and a realistic way to repay it.
How does the loan work?
The process varies between lenders, but it will normally involve five main stages.
1. The existing borrowing is established
The lender and its solicitor will examine the property title and obtain details of every loan already secured against it.
Up-to-date statements or redemption figures will usually be required. These show how much is owed and where each lender ranks.
2. The property and total borrowing are assessed
The property will normally be valued, with the lender considering its condition, location and saleability.
The lender will then calculate the total borrowing secured against the property, including its proposed facility.
This is often expressed as a combined loan-to-value ratio:
Combined LTV = total secured borrowing ÷ property value × 100
Suppose a property is worth £500,000 and already has a £250,000 first charge mortgage. A proposed £100,000 second charge facility would bring the total secured borrowing to £350,000, producing a combined LTV of 70%.
The lender may calculate this using the gross facility, including retained interest and fees, rather than only the cash received by the borrower.
3. The purpose and exit are reviewed
The lender will want to understand why the money is required, how it will be used and how the bridging loan will be repaid.
It must consider the existing borrowing as well as the proposed new facility.
4. The legal requirements are resolved
The solicitors will establish whether an existing lender must provide consent, receive notice or enter into an agreement governing the priority of the charges.
5. The loan completes
Once the lending, valuation and legal requirements have been satisfied, the loan can complete and the new charge is registered in its agreed position.
Does the existing lender need to consent?
Not in every case, but consent should never be assumed to be unnecessary.
The existing mortgage conditions may restrict further borrowing or prevent another charge from being registered without permission. There may also be a restriction on the property title requiring the first lender’s consent.
Depending on the transaction, the legal requirements could include:
Formal consent from an existing lender
Notice being given to that lender
A waiver or consent letter
A deed of priority or postponement
Confirmation that the new loan will not breach existing terms
A specialist bridging finance solicitor can examine the loan documents and property title to establish what is required.
All existing borrowing should be disclosed at the beginning of an application. Discovering an additional charge during the legal process can delay or prevent completion.
The most appropriate option depends on the purpose, urgency, existing mortgage terms, total cost and intended repayment strategy.
What does a second or third charge bridging loan cost?
Depending on the product, interest may be retained, rolled up or serviced monthly.
Where interest is retained or rolled up, the borrower may not make monthly interest payments. Instead, the interest is included within the facility or added to the amount due when the loan is redeemed.
The headline interest rate is only one part of the cost. Borrowers may also need to consider:
Arrangement fees
Valuation costs
Legal costs
Broker fees
Administration charges
Exit fees, where applicable
Extension or default charges
Interest charged on fees or retained interest
Additional legal work involving existing lenders can also affect the cost and timescale.
Our guide to bridging loan interest, fees and total borrowing costs explains what to examine when comparing facilities.
What will the lender assess?
Each lender has its own criteria, but it is likely to consider:
The property’s value, type, condition and location
The balances of the existing secured loans
The order in which the lenders rank
The combined LTV, including interest and fees
The purpose of the borrowing
The proposed exit strategy
The time needed to achieve that exit
Any consent or title restrictions
Credit history, income and affordability where relevant
The borrower’s experience where the project requires it
What happens if the original exit is delayed
Applicants should be prepared to provide mortgage statements, redemption figures, details of existing charges and evidence supporting the proposed exit.
Where the loan will fund refurbishment or development, the lender may also require details of the works, costs, planning position and professional team.
Fewer lenders consider third charge applications because the new lender sits behind two existing lenders. Those that do may require stronger evidence of the remaining equity, legal arrangements and repayment strategy.
Why is the exit strategy so important?
Bridging finance is short-term borrowing. The lender therefore needs to know how and when it will be repaid.
Possible exit strategies include:
Selling the property
Refinancing all the secured borrowing onto a new facility
Refinancing only the bridging loan
Selling another asset
Repaying the loan from another clearly evidenced source
If the property is sold, the proceeds are normally applied according to the lenders’ priority. The first charge lender is repaid before the second, and the second before the third.
The expected sale price or refinance must therefore be sufficient to repay the earlier charges as well as the bridging loan, interest, fees and transaction costs.
Our guide to how lenders assess a bridging loan exit strategy explains the evidence they may require.
Property security protects a lender if something goes wrong. It is not a substitute for a repayment plan.
Are second and third charge bridging loans regulated?
The position of the charge does not, by itself, determine whether a loan is regulated.
First, second and subsequent charge loans can fall within the FCA’s regulated mortgage framework. The position depends on factors including who is borrowing, how the property is occupied, the purpose of the loan and the structure of the facility.
If the property is occupied or intended to be occupied as a home by the borrower or a close family member, the transaction may fall within the FCA’s regulated mortgage framework. Its regulatory status should therefore be established at the outset.
Our guide to regulated and unregulated bridging loans explains the distinction in more detail.
If regulated borrowing may be required, the borrower should use a broker and lender with the appropriate FCA permissions.
What are the risks?
Adding another charge increases the debt secured against the property.
The main risks include:
Interest and fees reducing the remaining equity
The property falling in value
A sale or refinance taking longer than expected
The exit producing less money than anticipated
The new charge breaching existing mortgage conditions
Legal or consent requirements delaying completion
Fewer refinancing options because several charges must be repaid
Enforcement action if the loan is not repaid
Before taking another loan against a property, establish exactly how much is already secured against it, where the new lender will rank and how every lender will be repaid.
If those answers are unclear, the fact that the property contains equity is not enough.
Borrowers considering additional secured finance can find the right bridging loan or speak to an experienced broker and solicitor about the available options.
