Understand how second charge bridging loans can help homeowners
When you’re in a bind and need easy and quick funds to help bridge a financial gap, second-charge bridging loans may be the answer. Before taking on this loan responsibility, knowing the pros, cons and everything in between really helps make a good decision.
What is a second charge bridging loan?
Second-charge bridging loans are a type of short-term financing that can be secured against a property the borrower already owns. They are called “second charge” because the lender takes a second position behind the primary mortgage lender. This allows homeowners to access the equity in their property quickly, even if they already have an existing mortgage.
Second-charge bridging loans are often used as a stopgap measure. An example of this is to cover the period between selling one property and purchasing another. They can be a valuable financial tool but come with higher interest rates and fees compared to traditional mortgages.
Benefits of second charge bridging loans
It’s faster and has flexibility
One of the main advantages of second-charge bridging loans is their speed and flexibility. The application and approval process is typically much faster than going through a high-street lender for a mortgage or remortgage. This can be crucial when trying to complete a property purchase before a deadline.
“Second charge bridging loans offer an immediate injection of funds without the lengthy application process associated with traditional lending,” explains Gary Hemming, an expert at ABC Finance.
No need for a perfect credit score
Another benefit is that borrowers don’t necessarily need perfect credit to qualify. Lenders will primarily focus on the value of the property being used as security, rather than the applicant’s personal financial history. This opens up access to finance for those who may not meet the strict criteria of high-street banks.
Leverage equity
This type of loan allows homeowners to access the equity in their property even with an existing mortgage.
Costs and considerations
Higher interest rates
The tradeoff for the speed and flexibility of second-charge bridging loans is that they tend to be more expensive than traditional mortgages. In addition to higher interest rates, there are also often arrangement charges that add to the overall cost.
“It’s important for borrowers to carefully consider the total cost of a second charge bridging loan, not just the headline interest rate,” cautions Hemming.
Lending higher percentage of property value
Another factor to weigh up is the loan-to-value (LTV) ratio. Bridging lenders will typically lend up to 70-80% of the property’s value, meaning the borrower needs to have a significant amount of equity available. This may limit the viability of second-charge bridging loans for those with smaller amounts of home equity.
When to consider a second charge bridging loan
Second-charge bridging loans can be particularly useful for property investors or landlords looking to finance a new purchase before selling an existing property. They can also provide a lifeline for homeowners facing a time-sensitive financial need, such as paying for essential home repairs or avoiding mortgage arrears. However, they are not suitable for everyone and should only be used for short-term financing needs.
Is a second charge bridging loan for you?
Second-charge bridging loans can be a valuable financial tool for homeowners who need to access equity quickly. They offer multiple benefits that traditional lending can’t always provide.
However, it’s worth keeping in mind that the higher costs mean they should be carefully considered against the specific needs of the borrower. Professional advice at ABC Finance is recommended to ensure a second-charge bridging loan is the most suitable option.
