First Charge vs Second Charge Bridging Loans, What Are The Key Differences?

Whenever you borrow money, the lender needs some kind of security that they will get their money back. The more you borrow, the riskier it is for them.

That's why many loans - bridging loans and mortgages included - must be secured against a property. If you then can't make your repayments, the lender can repossess and sell your home as a last resort.

What Is a Bridging Loan?

A bridging loan is secured against your home, supporting you until the money you are due is paid. A first-charge loan is against a property with no mortgage, while a second-charge loan is on a mortgaged property, and remains a second priority.

Securing one loan against your home is usually no problem. But what if you need to borrow more? Then the situation gets more complicated. One lender has to be second in line to recover their money if repayments aren't met, and lenders don't like being in that situation.

Bridging loans can be secured in either of these situations - the only loan, or one on top of an existing mortgage. This guide looks at the difference between these first charges and second charge bridging loans and what some of the benefits of each are.

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What Is a Bridging Loan?

There is a range of different uses for a bridging loan, but they all have one thing in common: the need to access cash quickly. Bridging loans are used to temporarily plug a financial gap between making one purchase and money coming in from elsewhere.

What Are Bridging Loans Used For?

Bridging loans are commonly used to bridge the gap between selling one home and completing the purchase on another. They let homeowners who are struggling to sell their home move on and into a new one before they sell their existing property.

Bridging loans are also found in non-residential property purchases. They can be used to raise funds quickly for property development opportunities or buy-to-let investments where the buyer has no intention of them or their immediate family living in the property they want to buy. Bridging loans can also be used for purchases a mortgage wouldn't cover, such as uninhabitable properties or plots of land.

First Charge and Second Charge Bridging Loans

Whether a bridging loan is a first charge or second charge depends on if the property you put forward as security for the loan already has an existing loan or mortgage secured against it.

What Is a First Charge Bridging Loan?

A first charge bridging loan is where there is no existing loan secured against the property. This would be the case if a mortgage has already been paid off, if the loan is being taken out to pay the mortgage in full or if the house was purchased by cash buyers in the first place.

A first charge bridging loan tells a lender that they would be first in line to be repaid from the funds raised by the sale of your house should you fail to repay your debts.

What Is a Second Charge Bridging Loan?

A second charge bridging loan is typical where there is already a loan or mortgage secured against the property. This doesn’t mean that you can’t borrow any more; there just needs to be enough equity tied up in the property to cover the loan. Lenders are less keen on second charge bridging loans, and the approval criteria tend to be stricter, and interest rates higher.

A second charge loan tells a lender that they would have to wait for the mortgage to be paid off first should you default on your repayments.

Can You Borrow More if You’ve Got Already Got a Second Charge Loan?

If you already have first and second charge loans against your property, then you could seek a third charge bridging loan. Third charge bridging loans are very rare, but they do exist.

Of course, being third in the queue is even less appealing than being second, so lenders are few and far between. If you are thinking of going down this route, you need to be sure that you have a strong, realistic and viable exit strategy to pay back everything you owe.

Differences Between the First Charge and Second Charge Loans

In theory, there is little difference between how these loans work day-to-day. They are both short-term, temporary loans that need to be paid off within a certain timeframe, plus interest. Behind the scenes, however, there is a lot more risk attached to second charge loans.

This means you will see some differences when borrowing the first charge and second charge loans.

• Different interest rates. As the lender is effectively taking more of a risk on you, second charge loans generally come with less favourable interest rates[1] . You may find yourself looking at the upper end of the typical 0.5% to 2% monthly interest rate.
• Different hoops to jump through. A second charge bridging loan is an extra level of complexity on top of an existing plan. For this reason, second charge lenders usually need the permission of the first charge lender before they can even be added.
• Different exit strategies. In general, there are two ways to pay off a bridging loan at the end of its term: sell off your property, or remortgage. Second charge lenders may be less likely to accept anything other than a property sale as an exit strategy as they are banking on your strategy being water-tight and set in stone as much as possible.
• Different approval criteria. Someone with bad credit will find it harder to secure a second charge bridging loan than they would a first charge one. Again, this mainly comes down to the lender being reluctant to take on more risk than they have to.
• Different FCA regulation status. If you want to borrow for commercial purposes, there’s a good chance that your bridging loan will not be regulated by the Financial Conduct Authority. This means you will have less protection from mis-selling as unregulated lenders aren’t bound by the same high standards as regulated ones are.

Should You Choose a First or Second Charge Bridging Loan?

Ultimately, this isn’t something you can really choose. It depends on the property you plan to use as security for the loan and whether or not it already has a mortgage secured against it.

Generally speaking, you will find it harder to secure a second charge loan than a first charge one. However, there are a few alternatives to bridging loans that you could explore if you are struggling to borrow. If you’re not sure what your options are, it’s always a good idea to seek guidance from an independent financial advisor or bridging loan specialist.

How Can Money Savings Advice Help You With Bridging Loans?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Bridging Loans brokers. They have already helped thousands of people get the best Bridging Loan deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.