Entering the property market is a challenging task. It is a competitive industry that requires a solid base of understanding and skill in order to reap its extensive rewards. In addition to this competence barrier, there is a significant financial barrier. Property is, unsurprisingly, an expensive investment after all.
Because of the high price of entry, property developers are always looking for innovative and effective methods of financing their operations. One method of finance that has seen significant use is second charge bridging loans.
A second charge bridging loans is an excellent form of finance for the property development industry. This is largely due to the level of flexibility offered by the loan type, one difficult to acquire through other means. In this article, we will break down this form of finance and detail the benefits it could provide you.
What is a second charge bridging loan?
A second charge bridging loan is a type of loan taken out after another loan, such as a mortgage or a bank loan. Second charge bridging loans can be obtained only if there is equity left in a property after the other loans are considered.
Second charge bridging loans are a form of secured loan, meaning they require physical property or assets to be used as collateral. This isn’t as limiting as it might sound, as second charge bridging loans can be secured against any property. Residential property, commercial property, and rental property can be used. While this makes second charge bridging loans quite flexible, it does mean that failure to repay the loan could lead to the repossession of your collateral assets. Although a second charge bridging loan is a form of secured loan, it has a significantly shorter time until maturity. They tend to last no more than 12 months, which is quite rare for other forms of secured loans.
One considerable limitation to second charge bridging loans is approval. As they are taken out after another loan, you will need to seek the approval of the providers of your existing loans. This is due to the increased risk posed by having more debt secured against the property you used as security for other loans. If you can’t gain approval, you can’t obtain a second charge bridging loan.
The benefits of a second charge bridging loan
Despite the aforementioned limitation, second charge bridging loans have a host of benefits to offset their inadequacies. Let’s take a look at the main benefits.
Can be used in conjunction with a mortgage
A second charge bridging loan can be used in addition to other loans, most notably mortgages. If you were to take out a second charge bridging loan, the terms of existing loans would not change. This enables you to better organise your repayments, with the additional capital you now have available. This could save you a great deal in interest, or on penalties for making late repayments.
Quick access to funds
One of the core advantages of any form of bridging loan is speed. A bridging loan aims to provide you with funds quickly, allowing you to purchase or fund whatever you need. By the same token, you are expected to repay the loan equally quickly, once your needs have been met. This flexibility makes second charge bridging loans an excellent choice for property development, as purchases must be made quickly in order to avoid missing an opportunity.
Provides funds when other sources are fully tapped
Most banks have a cap on the amount of money they can lend. With other rules and restrictions surrounding whether they accept or reject a loan. This can make obtaining a mortgage difficult, and if you need to remortgage or refinance, it can be as good as impossible. For many private lenders, it can be a similar story.
Second charge bridge loans provide a solution to this problem. As they are a form of secured loan, they do not have such problems. The amount you can take out is based on the value of assets used as collateral. Alongside the amount of equity you have in them. In some cases, this can lead to loans into the millions. Because of this, second charge bridging loans can be a perfect method of finance for self-employed people, or those with an inconsistent income.
How to obtain a second charge bridging loan
As aforementioned, second charge bridging loans are a type of secured loan. This means that assets must be used as collateral, and provide a gauge as to how much money can be borrowed at a time. Naturally, a bridging finance provider isn’t likely to lend well over the value of the asset used as security, given the risk it presents.
Though you might be limited by the value of your assets, you won’t be limited by the type of them. Unlike many other forms of finance, bridging lenders will accept almost anything as collateral. In the property development industry, the typical collateral is also property. That said, vehicles, equipment, and even jewelry can be used, provided the assets have enough value.
When you apply for a second charge bridging loan, your prospective lender will first evaluate the assets you intend to use as security. This is the most important part of the process. Unlike most other forms of finance, bridging lenders don’t place much emphasis on your credit rating. While it is still a factor, your assets are what provide the layer of security for bridging lenders. This allows them to recoup their capital should you be unable to repay the loan. Assuming your assets are found to be of high enough value, most lenders will approve the loan there and then. Once approved, the money will be in your account within days.
Conclusion
Second charge bridging loans provide a quick and straightforward means of raising capital. While this can be used by anyone, it is particularly useful for those in the property development industry. Opportunities come and go quickly, meaning finance must be acquired swiftly and often in large amounts.
However, this form of finance isn’t without fault. As it is a form of secured loan, it comes with the risk of asset repossession if you can’t make repayments. They can also be relatively expensive, something that is compounded by their short duration. Provided you are confident in your ability to make repayments, second charge bridging loans could be just what you need to get started on a new project.