When deciding to apply for a bridging loan, it’s essential to understand the different types available and how each will be repaid should you not make the payments.
Our guide will take you through the different types of bridging loans and answer the question – what are first, second, and third charge bridging loans?
Types of Bridging Loans
A bridging loan is a short-term way to obtain finance, for example, when you need to cover the purchase of a property while you are waiting for your current one to sell. Each bridging loan will be assessed and the appropriate charge added to it, based on whether you have any other finance associated with the property you have used as security. This charge will indicate the priority order the debt will be repaid if you cannot make the repayments, or your property is sold or repossessed.
Three types of charges can be added to a bridging loan – first, second, and third.
First Charge Bridging Loan
If you own your property outright or have taken out a bridging loan to pay off an existing mortgage, then the capital loaned to you will come with a first charge. This means that the bridging loan will be the first debt to be cleared upon the sale of your property as it is the only secured finance in place.
A first charge will also be applied if you buy a property at auction and obtain a bridging loan, such as fast bridging finance to complete the sale. You will then be expected to clear this short-term bridge loan once you have secured a standard mortgage or sold the property.
By establishing a contract with you and another party to combine all the monetary transactions, the bridging loan provider can arrange for the sale of your property/properties. However, you can choose to place charges on either the property you are selling or the property you are looking to buy.
Second Charge Bridging Loan
A second charge will be placed on your loan if it has been taken out on your primary property and a mortgage is already in place. The existing mortgage as the first secured debt will take priority in the event of a repossession or property sale. This means the bridging loan will be second in the queue to be paid out after the property has been sold.
Third Charge Bridging Loan
A third charge is less common than a first or second as many loan companies are reluctant to apply it as part of a bridging loan. A third charge bridging loan could be considered if you already have a first and second charge against the property, which means the loan will be third to be paid back.
This type of charge has its risks as the lender may have to consider alternative ways to recoup their money. A third charge debt can also place extra financial burden on the borrower.
Get Expert Advice
With some challenges to obtaining a second or third charge bridging loan, it is important to get the right advice when exploring your short-term funding options.
Working with a bridging finance specialist will also ensure you understand the process and what is involved so you can make an informed decision on what is right for you.
