The Layman's Guide To Second Charge Loans

Your reasons for choosing a bridging loan can vary from the urgent requirement of funds to not qualifying for solutions offered by traditional financial institutions. Irrespective of the reasons that led you to this article, we have compiled everything you need to know about second-charge loans.

Large loans allow lenders to take control of borrowers' assets in case of a discrepancy in the loan repayment plan. The lender can take charge of the development project, developer assets, or the land it sits on in case of failure to repay the loan within the term. The lenders' right to acquire borrowers' assets is called 'charge .'

The sale of the developer's assets can allow complete or partial recovery of the principal loaned amount along with the accumulated interest when default on loan occurs. The lender holding the primary right or charge over the development property is the holder of the 'first charge.' If you acquire a second loan on the same asset, the subsequent charge holder is called the 'second charge.'

The 'charge' effect comes into effect if the holder defaults on their repayment obligations. The first charge holder acquires assets against their loan; then the second charge holder receives the residual value of investments to fulfil the dues.

What Is A Second Charge Loan?

Mortgages and business loans work on a similar concept with stricter rules and security 'backing' the assets. Alternative finance solutions, crowdfunding, peer to peer and modern forms of lending follow a similar path by giving 'charge' of the property to the lenders.

A crowdfunding platform lends money to property developers by acquiring rights over the property if they fail to repay the loan. As a lender, you can get a charge over the development project, assets, or the land it sits on. Finalising the sale of these assets enables lenders to fully or partially recover the loaned amount.

Multiple charges can be created against the same asset by numerous lenders, as long as the value of the development project suffices. Acquiring a second charge loan can be an excellent option when you already have a first charge loan but require additional funds due to unexpected cost overruns or in case existing investors need to be replaced.

The rules associated with a second charge loan are the same as the first charge loan. However, the property acquisition rights related to the second charge come into effect only once the first charge has been fully satisfied. So, if you catch yourself needing more funds than offered by the first charge lender, acquiring a second charge loan backed by the same assets can be fruitful.

Second charge lending has a higher risk associated with it, as there are higher chances of failure to recover the money lent through the resale of the assets under a first charge. Recovering a second charge loan amount takes longer, making it riskier than a first charge loan. Hence, second charge loans are offered at a higher interest rate than first charge loans.

A lender may require you to pay a premium for second charge lending offering higher returns than first charge loans. A lender may accept part ownership of the development project as part of the loan terms offering lenders a chance to receive capital gains once the sale of the project is finalised.

Who Can Benefit From Second Charge Bridging Loans?

The people that can benefit from a second charge bridging loan include:

When you have a Low rate/interest-only mortgage:

A second charge bridging loan enables borrowers to keep their current mortgage rate without affecting their existing terms and conditions. A second charge bridging loan offers flexible repayment options helping you save thousands of pounds in interest.

Getting out of early repayment charges when locked into a fixed rate:

Failure to repay instalments on your existing fixed-rate mortgage can often cause you to pay a hefty penalty. A second charge bridging loan can help you avoid the penalty helping you save money in the long run. It would be good to run a cost comparison in this scenario to make an educated decision.

When you need funds on short notice:

Traditional means of acquiring financial solutions such as a mainstream bank may take several months. In contrast, a bridging finance company like UK Property Finance can make lending decisions within hours of the initial inquiry, releasing funds on short notice, sometimes under two weeks. A second charge bridging loan can prove effective when borrowers need a rapid cash injection.

Conclusion

Summing up the points discussed in our comprehensive layman's guide to second-charge loans, they are a robust financial solution offering significant savings for all kinds of borrowers when traditional financing solutions are deemed unsuitable.

UK Property Finance is a pioneer of financial solutions. Our second charge bridging loan offers clients time to carry out the work on development projects and increase the investment property significantly. Second charge loans entail lenders selling the investment asset to recover their loaned amount. Use our bridging loan calculator to work up the costs associated with your choice of financing solution.

For more information on the second charge bridging loans, get in touch with us on 0116 464 5544 or fill in our contact form, and someone will be in touch with you shortly.