What is a second charge loan and how does it differ from a bridging loan?

8 Jan 2020 by Top Tier Bridging Loans

second charge loan

When you take out a bridging loan, the loan is based on the value of your property and so a second charge is placed on your property which acts as security. This is not the same as a second charge loan which is more commonly known as a second mortgage.

Bridging loans are short-term loans that can be used for a number of reasons but are most commonly used to pay for a property purchase while selling an existing property. They are usually part of some type of longer-term financing and they bridge the gap between the two transactions.

Second charge loans, or second mortgages, are long-term loans which are also secured against the property. They are used instead of remortgaging the first mortgage, but the process to arrange one is the same.

They are different types of loans used for very different purposes and there are a number of important differences between them.

Short term vs long term

Both types of loans have access to high-value funds and are secured against property. However second charge loans or mortgages are used for long-term financing from 3-25 years, whereas bridging loans have a maximum term of 36 months. Here at Top Tier we arrange bridging loans with a maximum term of 24 months.

Regulated and unregulated lenders

Second charge loans can only be provided by lenders regulated by the Financial Conduct Authority (FCA) which means loans are subject to tighter UK and EU lending rules. Bridging loans, on the other hand, are often arranged through unregulated lenders and the loans do not need the same level of checks.

Different application process

As there are tighter checks for a second mortgage, such as proof of income and ability to pay, this results in a longer application process. The knock on effect is that it takes longer to receive the funds. With a bridge loan, the loan is based on the value of the property and no other checks are required. This means the funds can be released quickly, usually within a couple of weeks. For both types of loans there could also be a number of other charges such as exit fees and early repayment fees, so you need to find out all of the charges and calculate the total cost of the finance.

Interest rates

As bridging loans are short term and flexible, they have higher interest rates than for the longer-term second mortgages. In addition, as they can be needed for months instead of years, they are quoted monthly instead of yearly. Interest on a second mortgage is paid monthly while bridging loans do not have monthly interest repayments – the interest is rolled up and paid at the end of the loan.

Still not sure whether to apply for a second charge loan or a bridge loan? Get in touch.

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