A bridging loan is a form of finance that effectively ‘bridges’ a gap in your finances, for example, when buying a property while waiting for your current one to sell. You can also obtain a bridging loan for land to take advantage of time-crucial land purchasing opportunities and situations.
When applying for bridging finance, your loan will come with one of three ‘charges’ – first, second or third. These indicate the order in which the outstanding loan will be repaid if you default or your property is repossessed.
We explore how each bridging loan charge works.
First Charge Bridging Loan
If your bridging finance is assessed as a first charge, then this means that, in the event of a default on the loan, it will be the first to be paid off before any creditors.
A first charge loan will be applied if you own your current property outright or have taken out the bridging loan to clear an existing mortgage. The outstanding loan will be paid off first from the equity of a completed property sale or when a new mortgage is secured. Any other loans secured to the property will then be repaid from any remaining sale funds.
With a second charge, the assessment is based on whether an existing mortgage is already on the property. In this case, the pre-existing mortgage is the first secured debt and so will be at the front of the line to be repaid should the property be repossessed and sold.
As a second charge, the bridging loan will be paid next from any outstanding equity from the property sale.
Although not as commonly used as first and second charges, obtaining a third charge bridging loan is possible. A third charge loan can be considered if you need short-term finance but already have a first and second charge loan secured against your property.
This means the bridging loan is third in line to be cleared should you be unable to make your repayments and there is still equity left once the property is sold.
A third charge loan is considered to be risky by many bridge finance lenders as they could find themselves having to explore alternative ways to recoup their loan money. A third charge debt also places an additional financial burden on the borrower and so must be carefully considered before applying.
Always speak to an expert
Careful consideration is needed before applying for a first, second or third charge bridging loan, including weighing up the risks and how you intend to repay the debt. To ensure you fully understand the bridging loan process and what is involved, it is essential to seek professional advice.
A bridging finance specialist will be able to take you through the whole application process, the different types of loans available and what you can expect. You can then make an informed decision based on your individual circumstances as to whether a secured bridging loan is the right route to take.