Bridging finance can be a uniquely convenient and cost-effective facility for raising short-term capital. When applying for a bridging loan, you will need to consider whether the security (collateral) you provide to cover the costs of the loan already has one or more debts secured against it.
This is where the difference between first, second and third charge bridging loans comes into play. This number – one, two or three – represents the order in which the debts you have secured on the property would be repaid, in the event of its repossession due to non-repayment.
First Charge Bridging Finance
With a first charge bridging loan, the asset you use to secure the loan will have no other debts currently secured against it. This means that if you are unable to repay the loan and the asset is sold, your bridging lender would be paid first using the capital raised.
First charge bridging finance is issued against properties with no outstanding mortgage or loan repayments, where the borrower owns 100% of the equity. Bridging loans can also be secured against other types of assets – anything from industrial equipment to fine jewellery to stocks and shares.
Second Charge Bridging Finance
If you secure bridging finance against a property where the original mortgage has not been fully repaid, this will constitute a second charge bridging loan. In this instance, the capital raised by selling the property in the event of non-repayment would first be used to clear the original mortgage, and then allocated to the bridging lender.
This presents an additional risk to the lender, as the remaining equity after the original mortgage is repaid may not always be enough to pay off the outstanding bridging loan.
Third Charge Bridging Finance
While it is possible to arrange a third charge bridging loan with some lenders, others consider such facilities too risky. Third charge bridging finance is issued where there is already a first and second charge secured against the property (or asset of value).
This would therefore mean that the bridging finance lender is technically ‘third in line’ for repayment, if the borrower defaults on their debts and forfeit their property. Consequently, third charge bridging finance is only issued where a lender has complete confidence in the applicant’s ability to repay all their outstanding debts in full.
Before applying for a bridging loan of any kind, consulting with an experienced broker comes highly recommended. This will help you build a better picture of the options available, along with which the type of bridging finance best suits your requirements.
For more information on any of the above or to discuss a bridging loan application in more detail, contact a member of the team at UK Property Finance today.
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